A short thread on exciting recent research by my colleague Sayantan Ghosal @UofGAsbs @UofGlasgow featured as part of the @ESRC 'Rebuilding Macroeconomics' project. It deals with anxiety in markets and how policymakers can stabilise expectations. This matters post- #COVID19 (1/9)

The project is with co-investigators @leaza_mcsorley @ekkehardernst and Marcus Miller. It deals with situations in markets when anxiety rises, and economic actors put more weight on expected negative outcomes. They then overreact to negative news and discount positive news. (2/9)

Why does this matter? Because agents in markets collectively react to the anxiety of others, it can lead to a sub-optimal equilibrium. Intuitively, for instance, it can lead to sub-optimal levels of investment. In one paper Gabriel Degranges and Sayantan Ghosal examine... (3/9)

...how markets behave in these situations: "Partial Consensus in Large Games and Markets".A subsequent paper with Francesco Carbonero,Jeremy Davies, Ekkehard Ernst, Sayantan Ghosal, Leaza McSorley looks at some empirical evidence on how anxiety affects intertemporal markets (4/9)

The empirical paper looks at how anxiety impacts on stock market outcomes. In terms of recent policy events, Brexit is seen as an interesting case. The lack of consensus about the actual end-game impacted negatively on consumer sentiment because of...(5/9)

...a lack of a focal point in the UK government's objectives. This generated anxiety in investment and consumer sentiment. What the authors show is that 'lighthouse policies' can play an important role in reducing economic anxiety and co-ordinating expectations. (6/9)

A good example of a 'lighthouse policy' is the @ecb 's promise under Mario Draghi to do 'Whatever it takes' during the Euro-debt crisis of 2012. In contrast simple policy announcements not backed by actions will not reduce market anxiety. (7/9)

There are important lessons for macroeconomic policy post- #COVID19 : one can imagine anxiety depressing consumer and investment sentiment. The role of government policy in providing a focus to anchor expectations in recovery will be important - see commentary by @NIESRorg (8/9)

For more details and the original papers, see https://www.rebuildingmacroeconomics.ac.uk/anxiety-and-narratives (9/9)