Barnard Economist Sharon Harrison Provides Perspective on How People's Behavior Can Affect State of Economy
 New York, NY-- Predicting economic booms and busts can be made easier and more accurate by understanding human expectations and behavior, says Barnard economist Sharon Harrison. She has worked with an economic model that closely predicts economic output during the Great Depression era. She argues that "sunspots" - interpreted as people's behavior and expectations about the economy before and during the Depression - led to the drastic economic downturn.
Harrison based her work on a model developed by Benhabib, Farmer, and Guo, one of the first models which focused on non-fundamental shocks - factors not directly related to the economy - as drivers of the economy. These shocks are referred to as "animal spirits," a term first used by John Maynard Keynes, or as "sunspots." The first term refers to Keynes' theory that investors' spontaneous waves of optimism and pessimism caused short-run shifts in output, and the second refers to the idea that anything unrelated to the economy can alter its status.
Harrison, with economist Mark Weder, has written "Did Sunspot Forces Cause the Great Depression?" (accepted pending revision in the Journal of Monetary Economics ). The central argument is that pessimism during the Depression era drove the economy into depression. Harrison's model, using expectations as the driver of the economy, predicted economic output with surprising accuracy - the output displayed in the model came very close to actual output in the data.
Harrison's research stems from her belief that understanding people's behavior is essential to understanding the economy. The interface between economics and psychology is useful in determining the current and future state of the economy.
"The implications of my findings can be helpful when designing monetary and fiscal policies," said Harrison. "When designing new policies, it is important for policymakers to take into consideration that people's behavior can drastically influence the economy. There may be an important role for government policy to prevent expectations from being self-fulfilling, in order to prevent episodes like the Great Depression from reoccurring."
A major portion of Harrison's research focuses on these expectations-driven models, in which many equilibria can result, depending on people's expectations. These models with indeterminacy of equilibria highlight the importance of analyzing people's behavior and expectations about the economy.
"I find the concept of indeterminacy of equilibria to be both realistic and fascinating," said Harrison.
Harrison's current predominant interest is in studying fiscal policy; and she will pursue more research related to the effects of fiscal policy with respect to indeterminacy. In her paper, "Balanced Budget Rules and Macroeconomic Instability," published in the Journal of Economic Theory with economist Jang-Ting Guo from the University of California, Harrison found that changing the specification of the tax rate affected the indeterminacy properties of the model. Together with Guo, she plans to further investigate the role that the government plays in economies with self-fulfilling expectations.
"My interest in self-fulfilling expectations has made me aware of a weakness that economists face in using these models. We cannot predict the behavior of expectations, and this limits our knowledge of the economy," said Harrison. "My goal is to study this behavior from the perspective of psychology - I believe psychologists can truly contribute to our understanding of economic models based on their theories and experiments on "herd behavior" and the nature of self-fulfilling expectations."
As a result of her work, "Did Sunspot Forces Cause the Great Depression?," Harrison has become interested in applying neoclassical models with or without indeterminacy to economic events in the history of the United States. Her next goal is to examine the boom of the 1920s to see whether non-fundamental optimism was a primary cause for the economic upturn.
Harrison, an assistant professor of Economics, has taught at Barnard since 1997. She earned her Ph.D. in Economics from Northwestern University that year. She teaches macroeconomic courses, econometrics, statistics for economics, a first-year seminar, entitled "Chaos," and advises seniors writing theses. In 2004 she was recognized with the Gladys Brooks Junior Faculty Excellence in Teaching Award .
—Petra Tuomi, ptuomi@barnard.edu, 212-854-7907
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