Expectations in Finance and Macroeconomics: micro-foundations and macro implications

Abstract

This thesis is a trilogy that develops models of non-rational expectations, and studies their implications in financial and macroeconomic applications. The first essay draws a distinction between biases in learning from endogenous vs. exogenous outcomes and offers a theory of "Partial Equilibrium Thinking" (PET). The second essay studies the dynamic implications of these biases in a model of financial markets, and shows that partial equilibrium thinking lends itself to explaining both normal times market dynamics and the formation of bubbles and crashes. The third essay studies the implications of these biases in explaining key features of credit cycles and explores their policy implications.