Stanford node

Leader: Mordecai Kurz

The “Stanford Node” is an intellectual rather than a geographical description of the group of scholars who are expected to participate. I start by listing those who are likely to take part in this node.

Mordecai Kurz- Stanford University

Maurizio Motolese – The Catholic University of Milan

Carsten K. Nielsen – The Catholic University of Milan

Monica Piazzesi – Stanford University

Martin Schneider – Stanford University

Volker Wieland – The University of Frankfurt

Past research of this group has covered many topics from different perspectives. The view of Kurz, Motolese, Nielsen and Wu is that expectational coordination is rare hence diversity of market beliefs is generic. As a result, this group has studied the market consequences and policy implications of economies where diversity of belief persists. Their work has demonstrated diversity of beliefs has deep impact on financial markets and on economic dynamics. A brief summary can state that: (i) belief diversity is the main cause of high financial market volatility, high volume of trade, market bubbles and crashes, (ii) belief diversity is the main cause for an equity premium, (iii) belief diversity alters the nature of risk in financial markets thereby, in contrastto the standard way of defining risk in terms of realizations of exogenous shocks, the crucial risk any agent faces in the economy is the risk of what the market will believe in the future. Future market belief is a keydeterminant of future asset prices, future inflation rates or recessions. (iv) Although stabilization policy is desired by most in society, in economies with diverse beliefs stabilization is typically not Pareto Optimal.

Hence, there is a need for new and alternative criteria for justifying stabilization policy and the role of a central bank. This is an important open problem. A few references are provided below.

This space is too narrow to permit an outline of future work planned by members of the group. A general statement one can make is that the group remains focused on exploring the following issues:

(i) Causes of aggregate fluctuations and asset price volatility, and the impact of non-coordinated

expectations on the amplification of economic volatility.

(ii) The link between real economic fluctuations and financial volatility.

(iii)The potential role of expectation coordination in economic stabilization.

(iv)Feasible stabilization policies and criteria for optimal stabilization policies.

(v) Empirical work on the impact of expectation coordination and diverse beliefs. There is a great need for reliable data sources that permit empirical studies of the issues. It is important that the International Network promotes the development of new data sources on market expectations.