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Business cycle synchronization in a simple Keynesian macro-model with socially transmitted economic sentiment and international sentiment spill-over

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  • Hohnisch, Martin
  • Westerhoff, Frank

Abstract

We propose a simple Keynesian business cycle model in which national income expectations of heterogeneous interacting investors affect their investment decisions. The investors' expectation formation is influenced by their sentiment: investors who hold optimistic views about the future state of the economy expect a higher aggregate demand in the following period and thus invest more than pessimistic investors. The investors' sentiment is, in turn, subject to socio-economic interactions. Simulations show that our model has the potential to generate complex business cycle dynamics. Based on that framework, we provide a three-country model of business cycle synchronization in which spill-over effects on the level of sentiment synchronize national cycles, provided that investors believe that the economies are indeed coupled.

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Bibliographic Info

Article provided by Elsevier in its journal Structural Change and Economic Dynamics.

Volume (Year): 19 (2008)
Issue (Month): 3 (September)
Pages: 249-259

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Handle: RePEc:eee:streco:v:19:y:2008:i:3:p:249-259

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Web page: http://www.elsevier.com/locate/inca/525148

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References

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  1. Lux, Thomas, 2008. "Rational forecasts or social opinion dynamics? Identification of interaction effects in a business climate survey," Economics Working Papers 2008,07, Christian-Albrechts-University of Kiel, Department of Economics.
  2. Alfarano, Simone & Lux, Thomas & Wagner, Friedrich, 2006. "Time-variation of higher moments in a financial market with heterogeneous agents: An analytical approach," Economics Working Papers 2006,16, Christian-Albrechts-University of Kiel, Department of Economics.
  3. Simone Alfarano & Thomas Lux & Friedrich Wagner, 2005. "Estimation of Agent-Based Models: The Case of an Asymmetric Herding Model," Computational Economics, Society for Computational Economics, vol. 26(1), pages 19-49, August.
  4. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
  5. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  6. Reiner Franke, 2007. "Estimation of a Microfounded Herding Model On German Survey Expectations," Working Papers wp07-07, Warwick Business School, Finance Group.
  7. Frank Westerhoff, 2006. "Samuelson's multiplier-accelerator model revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 13(2), pages 89-92.
  8. Frank Westerhoff & Martin Hohnisch, 2007. "A note on interactions-driven business cycles," Journal of Economic Interaction and Coordination, Springer, vol. 2(1), pages 85-91, June.
  9. Michela Nardo, 2003. "The Quantification of Qualitative Survey Data : A Critical Assessment," Journal of Economic Surveys, Wiley Blackwell, vol. 17(5), pages 645-668, December.
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Cited by:
  1. Corrado Di Guilmi & Xue-Zhong He & Kai Li, 2013. "Herding, Trend Chasing and Market Volatility," Research Paper Series 337, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Gaffeo, Edoardo & Canzian, Giulia, 2011. "The psychology of inflation, monetary policy and macroeconomic instability," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(5), pages 660-670.
  3. Frank Westerhoff & Martin Hohnisch, 2010. "Consumer sentiment and countercyclical fiscal policies," International Review of Applied Economics, Taylor & Francis Journals, vol. 24(5), pages 609-618.

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