The Macro Seminar:
Time: 12:15 pm – 13:30 pm
Date: 13th of March 2023

Room 3001

Antoine CAMOUS (University of Mannheim) “Financial Stability and Financial Regulation under Diagnostic Expectations”

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.

Sponsors:
Olivier LOISEL (CREST)