Essays on Expectations in Macroeconomics and Finance

Chapter 1 delves into an in-depth cross-sectional analysis of lenders' beliefs. We leverage a unique loan-level dataset that provides precise measurements of lenders' expectations by incorporating borrower-specific probabilities of default. Our empirical investigation is anchored in a learning model, wherein bankers, equipped with diagnostic expectations, observe noisy firm fundamentals and make estimations regarding the likelihood of default. The results of our analysis reveal compelling evidence that financial institutions are susceptible to expectational distortions. Banks tend to exhibit overreactions to both micro and macroeconomic news, leading them to overestimate or underestimate borrower defaults following negative or positive signals. Furthermore, we observe considerable heterogeneity among banks in the extent of this overreaction. Additionally, we find evidence that overreacting bankers tend to adjust interest rates more compared to their rational counterparts. Furthermore, the probability of issuing new loans experiences corresponding fluctuations in response to positive or negative news. These findings are robustly confirmed through a structural estimation exercise that departs from a model of banking competition. In this model, banks' profit function hinges on borrowers' creditworthiness, which is influenced by the level of expectation distortion among banks and firm-specific economic news. Chapter 2 explores bank lending expectations using data from the Bank Lending Survey. It aims to understand how these expectations respond to monetary policy announcements. First we examine whether the belief formation process of banks aligns with the full-information-rational-expectations paradigm by testing the predictability of forecast errors. The subsequent aspect of our investigation centers on analyzing how bankers' beliefs react when the European Central Bank (ECB) makes monetary policy announcements. Findings affirm that there is predictability in the errors of banks' beliefs, and these errors are magnified when monetary policy announcements are perceived as purely monetary shocks. Moreover, we provide a description of the mechanism that underlies these empirical findings by introducing a macro model that accounts for risky debt, incorporates non-rational expectations and monetary policy shocks. Chapter 3 introduces a macroeconomic model that bridges the gap between non-rational expectations and financial constraints, aligning with the dynamics of a Minsky cycle. Financial crises have underscored the critical role of factors like debt and sentiment in shaping macroeconomic dynamics. This paper uniquely incorporates both elements within a theoretical framework that considers the impact of overreacting expectations to positive news alongside financial constraints. The model reveals that sentiment plays a pivotal role in initiating the boom phase, driven by inflated beliefs regarding the resale value of assets like home equity. However, a shift towards rational expectations prompts agents to exercise self-restraint in borrowing when they recognize the excessiveness of past debt demands. This mechanism leads to the establishment of a new equilibrium, primarily influenced by collateral limits. This equilibrium results in reduced demand for debt and compels agents to curtail their consumption.