Confidence and the Financial Accelerator

Myohl, Christian; Stucki, Yannic (July 2018). Confidence and the Financial Accelerator (Discussion Papers 18-23). Bern: Department of Economics

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We introduce financial frictions in the spirit of Bernanke, Gertler, and Gilchrist (1999) into a standard RBC model and use the heterogeneous-prior framework of Angeletos, Collard, and Dellas (2018) to accommodate confidence-driven business cycle fluctuations. We show that financial frictions strongly amplify the response to confidence shocks—more strongly than the response to fundamental shocks. Furthermore, we show that in the presence of financial frictions, prolonged episodes of unfounded optimism cause boom-bust cycles in investment and to a lesser extent in output. In particular, the financial state of the economy deteriorates severely after the initial boom, which leaves the economy more vulnerable to adverse shocks.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Myohl, Christian and Stucki, Yannic

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Discussion Papers

Publisher:

Department of Economics

Language:

English

Submitter:

Lars Tschannen

Date Deposited:

03 Sep 2020 08:32

Last Modified:

03 Sep 2020 08:32

JEL Classification:

E32, E44

BORIS DOI:

10.7892/boris.145877

URI:

https://boris.unibe.ch/id/eprint/145877

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