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Title: Belief Disagreement and Business Cycles
Citation Type: Miscellaneous
Publication Year: 2022
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Abstract: This paper studies how belief disagreement across households affects aggregate demand. I develop a model in which households are heterogeneously exposed to business cycles and show that the impact of disagreement can be summarized by a simple statistic-correlated disagreement which captures the correlation between beliefs and individual business-cycle exposure. I endogenize disagreement via heterogeneous attention, which implies that attention increases with exposure. So, correlated disagreement is positive. Then, I show that disagreement amplifies general-equilibrium effects and acts as a propagation mechanism amplifying business cycles. I also provide evidence of this positive correlation using survey data on expectations. To quantify the implications of disagreement, I extend the analysis to a Heterogeneous-Agent New Keynesian model featuring multiple sources of heterogeneity. I show that belief disagreement can substantially amplify business-cycle fluctuations. Finally, I show that targeting spending to the most cyclical workers can significantly increase the spending multiplier.
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Authors: Guerreiro, Joao
Publisher: Penn Economics
Data Collections: IPUMS CPS
Topics: Other
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