Principal Investigator: Professor Sayantan Ghosal

Sayantan Ghosal

Sayantan is Professor of Economics at the Adam Smith Business School and Dean of Interdisciplinarity and Impact at the Colege of Social Sciences. He was a Professor of Economics at the University of Warwick from 2004 to 2013 where he was Research Director of the ESRC funded Centre for Competitive Advantage in the Global Economy (CAGE). He also has a PhD from CORE, Universite Catholique de Louvain under the European Doctoral Program in Quantitative Economics.

Areas of expertise: Foundations of general equilibrium; Behavioural welfare economics; Poverty, marginalisation and internal constraints; Financial crisis; Endogenous formation of networks and groups; Political economy; Global cooperation and climate change; Long-run growth


Dr Ekkehard Ernst (International Labour Organisation)

Dr Leaza McSorley (University of Sunderland)

Professor Marcus Miller (University of Warwick)


Anxiety is an emotion that affects beliefs about future uncertainty and influences current payoffs. Such emotions are based on the perception of economic facts. Anxiety isn’t immutable but influences changes under the influence of (competing) narratives.

For example, if there is a hard Brexit how will households, firms and the financial markets react? Will there be a crash? By how much will aggregate demand shrink precisely at a time when there is limited room for policy manoeuvre? What can the Bank of England or the Treasury do now mitigate the anxiety to anchor expectations and limit the negative impact on investment and household consumption?

Keynes (1936) and Minsky (1975) have highlighted the role expectations play in generating endogenous fluctuations in macroeconomic outcomes. Recent work (Schiller (2017)) have highlighted the role narratives play in determining intertemporal market outcomes. Using rational expectations as a solution concept rules out stabilizing (as against coordinating) expectations as a problem. What is the role of policy (if any) in stabilizing expectations?

This project will focus on examining the conditions under which competing narratives co-exist, influence (and are influenced by) individuals’ emotions (modelled via belief dependent preferences), and their role in shaping individual behaviour and aggregate outcomes.

Research Questions

1. How do anxiety and competing narratives contribute to instability and lead to endogeneous fluctuations in aggregate outcomes?
2. How do policies shape competing narratives and influence their effect on anxiety?
3. What are the welfare trade-offs associated with a policy that aims to stabilize expectations?
4. How can policy communication support the effectiveness of policy changes?

Aims and Objectives

We will:

(a) develop a new solution concept for inter-temporal markets with belief dependent preferences, allowing for endogenously determined anxiety and heterogeneous beliefs;
(b) apply the theoretical concepts to selected, quantifiable models of the macroeconomy to understand phenomenon such as endogenously determined aggregate demand fluctuations, involuntary unemployment, asset price bubbles and liquidity preference;
(c) use data on sentiment/beliefs from existing empirical work and surveys to calibrate key parameters in the model and quantify the effects of anxiety and competing narratives on aggregate outcomes and economic welfare;
(d) empirically test the effect of policy in stabilising (as distinct from coordinating) expectations and reducing anxiety with new data (generated through new machine learning methods, text analysis and social network analysis).


Theory: We will develop a quantifiable theoretical framework to examine policies that stabilize (as against coordinate) expectations. We will adopt an explicitly non-equilibrium approach in settings with a unique equilibrium trajectory (this would allow us to differentiate the issue of stabilizing vs coordinating expectations). In such a setting, we will examine the conditions under which in the presence of anxiety (modelled via belief dependent preferences), non-equilibrium outcomes become approximately self-fulfilling and effect of policy that seeks to stabilize expectations.

Empirics: Using data on sentiment/beliefs from existing empirical work and surveys to calibrate key parameters, we (a) quantify the effects of anxiety and of competing narratives, (b) examine the key channels through which anxiety impacts on aggregate outcomes and welfare.


Results will be published here when available.