A review essay of Roman Frydman & Michael D. Goldberg's Beyond Mechanical Markets: Asset Price Swings, Risk, and the …

Standard Macroeconomics treats animal spirits as a source of uncertainty disturbing rational otherwise expectations … uncertainty. This paper identifies such spirits with the disturbance from the optimal decisionmaking implied by an emotional well …

We develop a theory of endogenous uncertainty where the ability of investors to learn about firm-level fundamentals … declines during financial crises. At the same time, higher uncertainty reinforces financial distress, causing a persistent … cycle of uncertainty, pessimistic expectations, and financial constraints. Through this channel, a temporary shortage of …

process of switching steady-state levels of the volatility of market conditions (SS-uncertainty). Decision-makers predict SS-uncertainty … regimes using past fundamental shocks, but an exogenous uncertainty shock still exists. Model estimation un- covers evidence … of state-dependent uncertainty effects. Shock responses significantly vary, depending on the current uncertainty regime …

Shleifer (2010), overreaction and confidence are affected by uncertainty, as a news effect interacts with an uncertainty effect … the conditional uncertainty, changes in uncertainty surrounding current and past beliefs affect the severity of the DE …) overconfidence in subjective uncertainty. An analytical RBC model featuring Smooth DE accounts for overreaction and overconfidence in …

This paper shows that monetary policy does and should respond systematically to time variation in ex-ante uncertainty …

We show that macroeconomic uncertainty can be considered as exogenous when assessing its effects on the U.S. economy …. Instead, financial uncertainty can at least in part arise as an endogenous response to some macroeconomic developments, and … overlooking this channel leads to distortions in the estimated effects of financial uncertainty shocks on the economy. We obtain …

A review essay of Roman Frydman & Michael D. Goldberg’s Beyond Mechanical Markets: Asset Price Swings, Risk, and the …