Finance and Economics Discussion Series (FEDS)
September 2025
Evaluating Macroeconomic Outcomes Under Asymmetries: Expectations Matter
Brent Bundick, Isabel Cairó, Nicolas Petrosky-Nadeau
Abstract:
Asymmetries play an important role in many macroeconomic models. We show that assumptions on household and firm expectations play a key role in determining the effects of these asymmetries on macroeconomic outcomes. If households and firms have perfect foresight and hence do not account for the possibility of future shocks, then the implied longer-run averages and distributions for unemployment and inflation can differ significantly from their rational expectations counterparts. We first derive this result analytically under either an asymmetric monetary policy rule or a nonlinear Phillips curve before numerically examining some of the key nonlinearities featured in the recent literature.
Keywords: Macroeconomic Asymmetries, Business Cycles, Expectations
DOI: https://doi.org/10.17016/FEDS.2025.079
PDF: Full Paper
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