We propose an elementary macroeconomic model with animal spirits in which aggregate investment expenditure depends on firms’ sentiment. Firms display one of three sentiment states. When national income increases (decreases) strongly, firms are optimistic (pessimistic) and aggregate investment expenditure is high (low). Otherwise, firms are neutral and aggregate investment expenditure is normal. A rigorous mathematical analysis of our elementary macroeconomic model sheds new light on how animal spirits may contribute to fluctuations in economic activity. In particular, we show that a bidirectional feedback process between national income and investor sentiment may create endogenous business cycles that coevolve with waves of optimism and pessimism.

Gardini, L., Radi, D., Schmitt, N., Sushko, I., Westerhoff, F., Sentiment-driven business cycle dynamics: An elementary macroeconomic model with animal spirits, <<JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION>>, 2023; 210 (N/A): 342-359. [doi:10.1016/j.jebo.2023.04.012] [https://hdl.handle.net/10807/238066]

Sentiment-driven business cycle dynamics: An elementary macroeconomic model with animal spirits

Radi, Davide
Secondo
;
Sushko, Iryna;
2023

Abstract

We propose an elementary macroeconomic model with animal spirits in which aggregate investment expenditure depends on firms’ sentiment. Firms display one of three sentiment states. When national income increases (decreases) strongly, firms are optimistic (pessimistic) and aggregate investment expenditure is high (low). Otherwise, firms are neutral and aggregate investment expenditure is normal. A rigorous mathematical analysis of our elementary macroeconomic model sheds new light on how animal spirits may contribute to fluctuations in economic activity. In particular, we show that a bidirectional feedback process between national income and investor sentiment may create endogenous business cycles that coevolve with waves of optimism and pessimism.
2023
Inglese
Gardini, L., Radi, D., Schmitt, N., Sushko, I., Westerhoff, F., Sentiment-driven business cycle dynamics: An elementary macroeconomic model with animal spirits, <<JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION>>, 2023; 210 (N/A): 342-359. [doi:10.1016/j.jebo.2023.04.012] [https://hdl.handle.net/10807/238066]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/238066
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