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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.

Suggested Citation

  • Hohnisch, Martin & Westerhoff, Frank, 2008. "Business cycle synchronization in a simple Keynesian macro-model with socially transmitted economic sentiment and international sentiment spill-over," Structural Change and Economic Dynamics, Elsevier, vol. 19(3), pages 249-259, September.
    • Handle: RePEc:eee:streco:v:19:y:2008:i:3:p:249-259
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Michael Wegener & Frank Westerhoff, 2012. "Evolutionary competition between prediction rules and the emergence of business cycles within Metzler’s inventory model," Journal of Evolutionary Economics, Springer, vol. 22(2), pages 251-273, April.
    2. 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.
    3. Di Guilmi, Corrado & He, Xue-Zhong & Li, Kai, 2014. "Herding, trend chasing and market volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 349-373.
    4. Franke Reiner, 2012. "Microfounded Animal Spirits in the New Macroeconomic Consensus," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-41, October.
    5. 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.
    6. Kai Li, 2014. "Asset Price Dynamics with Heterogeneous Beliefs and Time Delays," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 13, July-Dece.
    7. Kai Li, 2014. "Asset Price Dynamics with Heterogeneous Beliefs and Time Delays," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2014.
    8. Petar Sorić & Ivana Lolić & Marija Logarušić, 2022. "Economic Sentiment and Aggregate Activity: A Tale of Two European Cycles," Journal of Common Market Studies, Wiley Blackwell, vol. 60(2), pages 445-462, March.
    9. Reiner Franke, 2018. "Competitive moment matching of a New-Keynesian and an Old-Keynesian model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 201-239, July.

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