We study the impact of diverse beliefs on conduct of monetary policy. Individual belief is modeled by a state variable that defines an individual's perceived laws of motion. We use a New Keynesian Model that is solved with a quadratic approximation hence individual decisions are quadratic...

We study the impact of diverse beliefs on conduct of monetary policy. We use a New Keynesian Model solved with a quadratic approximation. Aggregation renders the belief distribution an aggregate state variable. Diverse expectations change standard results about a smooth trade-off between...

Why do risk premia vary over time? We examine this problem theoretically and empirically by studying the effect of market belief on risk premia. Individual belief is taken as a fundamental state variables. Market belief is observable, it is central to the empirical evaluation and we show how to...

We show diverse beliefs is an important propagation mechanism of fluctuations, money non neutrality and efficacy of monetary policy. Since expectations affect demand, our theory shows economic fluctuations are mostly driven by varying demand not supply shocks. Using a competitive model with...

This paper studies the dynamic volatility properties of a monetary economy in which agents hold Rational Beliefs (see Kurz (1994), (1997)) rather than Rational Expectations. Except for this feature the examined Rational Belief Equilibrium (in short, RBE) is entirely standard: markets are...