Overreaction and macroeconomic fluctuation of the external balance

• 成果类型: Article
• 署名作者: Na, Seunghoon; Yoo, Donghoon
• 署名单位: Purdue University System; Purdue University; Korea University
• 刊物名称: JOURNAL OF MONETARY ECONOMICS
• ISSN/ISSBN: 0304-3932
• DOI: 10.1016/j.jmoneco.2025.103750
• 发表日期: 2025
• 关键词: Diagnostic expectations; Small open economy; External balance; Volatility and cyclicality

摘要

We incorporate diagnostic expectations (DE) into small open economy (SOE) models to offer novel insights into business cycles, especially in emerging countries. DE induce overreactions in domestic absorption, leading to countercyclical external balances and endogenous boom-bust cycles driven by surprises rooted in distant memory. This framework offers a cognitive alternative to permanent income shock in conventional SOE models under rational expectations (RE). Using Argentine macro-international data, we estimate a quantitative SOE-RBC model with DE that captures the volatility and cyclicality specific to emerging countries and identifies diagnosticity levels consistent with prior research, and reduces reliance on trend-driven TFP shocks. Our findings highlight DE as an empirically plausible mechanism, enriching the literature by demonstrating how imperfect, memory-based expectations influence macroeconomic dynamics in an open economy context.