Confidence Of Agents And Market Frictions

This paper aimed at modelling business cycles after different demand shock under standard RBC one-sector economy without adjustment costs and with different type of consumers. This paper shows ways to overcome Barro-King challenge in the framework of asymmetric information between debtors and creditors, by showing that negative expectations about possibility of debtors running with the money might cause recession in the economy. This result is achieved through modelling "Overconfidence" of borrowers, who don't increase their labor supply in the presence of negative expectations. In the example of just two types of consumers paper shows that labor supply increases and consumption decreases, result equivalent to the standard RBC model and one representative consumer.