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Taking Stock: A Rigorous Modelling Of Animal Spirits In Macroeconomics

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  • Reiner Franke
  • Frank Westerhoff

Abstract

This paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro†dynamic models that can capture some of its crucial aspects in a rigorous way. Two approaches are considered: the discrete choice and the transition probability approach, where individual agents face a binary decision and choose one of them with a certain probability. These assessments are adjusted upward or downward in response to what the agents observe, which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions. Typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits. On the whole, the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework.

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  • Reiner Franke & Frank Westerhoff, 2017. "Taking Stock: A Rigorous Modelling Of Animal Spirits In Macroeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1152-1182, December.
  • Handle: RePEc:bla:jecsur:v:31:y:2017:i:5:p:1152-1182
    DOI: 10.1111/joes.12219
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    File URL: https://doi.org/10.1111/joes.12219
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    Cited by:

    1. Hiroki Murakami, 2019. "A note on the “unique” business cycle in the Keynesian theory," Metroeconomica, Wiley Blackwell, vol. 70(3), pages 384-404, July.
    2. Kubin, Ingrid & Zörner, Thomas O. & Gardini, Laura & Commendatore, Pasquale, 2019. "A credit cycle model with market sentiments," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 159-174.
    3. Dimitri Kroujiline & Maxim Gusev & Dmitry Ushanov & Sergey V. Sharov & Boris Govorkov, 2018. "An Endogenous Mechanism of Business Cycles," Papers 1803.05002, arXiv.org, revised Sep 2019.
    4. Franke, Reiner & Westerhoff, Frank, 2019. "Different compositions of aggregate sentiment and their impact on macroeconomic stability," Economic Modelling, Elsevier, vol. 76(C), pages 117-127.
    5. Papadopoulos, Georgios, 2019. "Income inequality, consumption, credit and credit risk in a data-driven agent-based model," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 39-73.
    6. Trimborn, Torsten & Frank, Martin & Martin, Stephan, 2018. "Mean field limit of a behavioral financial market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 613-631.
    7. Cavalli, Fausto & Naimzada, Ahmad & Pecora, Nicolò & Pireddu, Marina, 2018. "Market sentiment and heterogeneous fundamentalists in an evolutive financial market mode," MPRA Paper 90289, University Library of Munich, Germany.

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