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Microfounded Animal Spirits in the New Macroeconomic Consensus

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  • Franke Reiner

    (University of Kiel)

Abstract

The paper considers the formation of an average opinion index in a microfounded framework where firms switch between optimism and pessimism with certain transition probabilities. Here, the index represents a general business sentiment or the famous animal spirits, which feedback on themselves but are also influenced by the real interest rate. This concept is combined with three other components: the sentiment determines aggregate investment and thus finally the output gap in the economy; the variations of a so-called inflation climate are introduced into an ordinary Phillips curve; the interest rate is given by a Taylor rule. In this way, an alternative model of the new macroeconomic consensus is obtained, which is then reduced to two differential equations. The nonlinearities inherent in the sentiment adjustments can give rise to persistent endogenous cycles as well as multiple equilibria that may be locally stable or unstable. It is also demonstrated how the dynamics are affected by variations of a shift parameter that is interpreted as financial distress.

Suggested Citation

  • 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.
  • Handle: RePEc:bpj:sndecm:v:16:y:2012:i:4:n:4
    DOI: 10.1515/1558-3708.1898
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    References listed on IDEAS

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