The impact of shocks in dynamic environments depends on how forward-looking agents anticipate the path of future fundamentals that shape their decisions. We incorporate flexible beliefs about future fundamentals into a general class of dynamic spatial models, allowing beliefs to be evolving, uncertain, and heterogeneous across groups of agents. We show how to implement our methodology to study both ex-ante and ex-post shocks to fundamentals. We apply our method to two settings: an ex-ante study of the economic impacts of climate change, and an ex-post evaluation of the China productivity shock on the U.S. economy. In both cases, we study the impact of deviations from perfect foresight on different outcomes.

This talk is presented by the International Economics Seminar, sponsored by the Department of Economics with generous gifts given through the Economics Strategic Fund.