Living in an imaginary world that looks real

In the paper we show – using standard approaches, general equilibrium modeling and the assumption of complete rationality – that the macroeconomic environment is endogenous and is indeterminate. Specifically, it is argued – without resorting to sunspot type arguments – that microeconomic fundamentals do not suffice to characterize the economy at the macro level. In particular, we show how perceptions of rational agents of the workings of the economy (a) shape the environment, (b) affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not. As a by-product, we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise. Finally, we show that systematic errors can persist indefinitely under rationality.     

Macro-uncertainty and financial stress spillovers in the Eurozone

This paper studies macro-uncertainty and financial distress spillovers within the Eurozone. We propose a novel methodology to derive the indices of spillovers, by using a Global Vector autoregressive model fitted to data sampled at mixed-frequencies. We find that macro-uncertainty and financial stress are relatively disconnected in the Eurozone. We also show that connectedness between core and periphery Eurozone countries mainly operates through financial stress and it decreases since the outbreak of the Eurozone sovereign debt crisis (with an increasing role played by peripheral countries). As a result, investors and policymakers should monitor separately macro-uncertainty and financial stress. Finally, we find that the mixed-frequency data should be taken into account in this context, otherwise, the spillovers can be underestimated.