pessimism, optimism, and uncertainty that turn out to critically affect macroeconomic outcomes. Agents in the model are fully … beliefs and allows for an analytical characterization of uncertainty. Shocks to beliefs affect economic dynamics and … uncertainty. We use a prototypical Real Business Cycle to illustrate the methods. …

stabilization and agents face uncertainty about the nature of these deviations. When observing a deviation, agents conduct Bayesian … prompt return to the active regime, macroeconomic uncertainty is low, welfare is high. However, if a deviation persists …, agents’ beliefs start drifting, uncertainty accelerates, and welfare declines. If the duration of the deviations is announced …