Seminar in Makroökonomik - Financial Cycles under Diagnostic Beliefs
Wann
Montag, 9. Mai 2022
12 bis 13:15 Uhr
Wo
F425
Veranstaltet von
Lehrstuhl für Makroökonomik
Vortragende Person/Vortragende Personen:
Antoine Camous (Universität Mannheim)
Financial Cycles under Diagnostic Beliefs
Abstract: Swift changes in investors' sentiment, such as the one triggered by COVID-19 global outbreak in March 2020, lead to financial tensions and asset price volatility. We study the interactions of behavioral and financial frictions in an environment with endogenous risk-taking and capital accumulation. Agents form diagnostic expectations about future stochastic outcomes: recent realizations of aggregate shocks are expected to persist. This behavioral friction gives rise to sentiment cycles with excessive investment and occasional safety traps. The interactions with financial frictions lead to an endogenous amplification of financial instability. We discuss implications for policy interventions.