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Title: Belief Disagreement and Business Cycles

Citation Type: Miscellaneous

Publication Year: 2023

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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.

Url: https://www.dropbox.com/s/gzwkhihj8432kww/Guerreiro_JMP_Disagreement.pdf?dl=0

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Authors: Guerreiro, Joao

Publisher: Northwestern University

Data Collections: IPUMS CPS

Topics: Work, Family, and Time

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