The rational expectations paradigm is dominant in current macroeconomic theory and in the associated empirical work. In many situations, however, such assumption is unrealistically strong. My research revisits the way the formation of expectations is modeled by relaxing the assumption of rational expectations, and introducing more "behavioral" elements. It recognizes that economic subjects are attempting to learn about the uncertain economic environment they live in and are likely to revise their beliefs in light of past experiences. In this framework, my work studies the effects that deviations from full rationality, learning behavior, psychological factors, have on the persistence and volatility of macroeconomic variables, on the response of the economy to fundamental shocks, and on the magnitude of business cycle fluctuations in general.
In recent research, I show that shifts in "sentiment", i.e. waves of unjustified optimism and pessimism, are responsible for a sizable share of economic booms and busts.


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