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Animal Spirits, Financial Markets and Aggregate Instability

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Listed:
  • Wei Dai

    (School of Economics, University of Adelaide)

  • Mark Weder

    (School of Economics, University of Adelaide)

  • Bo Zhang

    (School of Economics, University of Adelaide)

Abstract

People's animal spirits are a significant driver behind the fluctuations of the U.S. business cycle. This insight is demonstrated within an estimated artificial economy with financial market frictions. Animal spirits shocks account for around 40 percent of output fluctuations over the period from 1955 to 2014. Financial friction and technology shocks are considerably less important with best point estimates for both near 20 percent. We also find that the Great Recession, for the most parts, was caused by adverse shocks to expectations.

Suggested Citation

  • Wei Dai & Mark Weder & Bo Zhang, 2017. "Animal Spirits, Financial Markets and Aggregate Instability," School of Economics and Public Policy Working Papers 2017-08, University of Adelaide, School of Economics and Public Policy.
    • Handle: RePEc:adl:wpaper:2017-08
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    File URL: https://media.adelaide.edu.au/economics/papers/doc/wp2017-08.pdf
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    Cited by:

    1. Hirose, Yasuo, 2020. "An Estimated Dsge Model With A Deflation Steady State," Macroeconomic Dynamics, Cambridge University Press, vol. 24(5), pages 1151-1185, July.
    2. Domenico Delli Gatti & Gabriele Iannotta, 2022. "Behavioural Credit Cycles," CESifo Working Paper Series 9954, CESifo.
    3. Pintus, Patrick A. & Wen, Yi & Xing, Xiaochuan, 2022. "The inverted leading indicator property and redistribution effect of the interest rate," European Economic Review, Elsevier, vol. 148(C).
    4. Pavlov, Oscar, 2021. "Multi-product firms and increasing marginal costs," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).

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    More about this item

    Keywords

    Endogenous financial frictions; indeterminacy; animal spirits; business cycles; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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