We study the role of diverse beliefs in a New Keynesian Model with financial assets. Financial markets are explicitly modeled by a stock market and a bond market. Individual belief is modeled by a state variable that defines the laws of motion perceived by an agent. The model is solved with a quadratic approximation hence individual decisions are quadratic functions. We show that aggregation renders the belief distribution an aggregate state variable. In the quadratic approximation both the mean and the variance of the cross-sectional distribution of individual beliefs affect the state of the economy. We provide examples in which high optimism about the future increases aggregate output but it is also associated with fluctuations in financial markets characterized by changes in risk premia. Also increased belief dispersion is beneficial to macro aggregates and is associated with lower risk premia contrary to recent views which link higher private beliefs dispersion to higher macro-uncertainty (see Bloom, 2009). Finally impulse response analysis shows that a more spread distribution of financial wealth is beneficial to the economy.
|Title of host publication||ESSAYS IN HONOR OF LUIGI CAMPIGLIO|
|Editors||M Baussola, C Bellavite Pellegrini, M Vivarelli|
|Number of pages||34|
|Publication status||Published - 2018|
- Diverse Beliefs
- Monetary Policy