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Aggregate sentiment dynamics: A canonical modelling approach and its pleasant nonlinearities

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  • Franke, Reiner

Abstract

The paper is an attempt at an alternative to the rational expectations assumption in macroeconomic modelling. Emphasizing the concept of sentiment in contrast to the expectations of a single selected variable, it is meant to take an important step forward towards a canonical heterodox framework for the microfounded modelling of irreducible uncertainty and, specifically, herding. Referring to a large population of agents who repeatedly face a binary decision problem, two stylized approaches are considered to describe the aggregate sentiment dynamics: the transition probability and the discrete choice approach. After a slight modification of the latter, the two specifications are shown to give rise to essentially the same adjustment equations. In addition to these conceptual issues, a two-dimensional prototype model is put forward which can illustrate the rich potential of an inherent nonlinearity to generate scenarios with single and multiple (point and set) attractors.

Suggested Citation

  • Franke, Reiner, 2014. "Aggregate sentiment dynamics: A canonical modelling approach and its pleasant nonlinearities," Structural Change and Economic Dynamics, Elsevier, vol. 31(C), pages 64-72.
  • Handle: RePEc:eee:streco:v:31:y:2014:i:c:p:64-72
    DOI: 10.1016/j.strueco.2014.08.001
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Flaschel, Peter & Charpe, Matthieu & Galanis, Giorgos & Proaño, Christian R. & Veneziani, Roberto, 2018. "Macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 237-256.
    2. repec:taf:quantf:v:16:y:2016:i:11:p:1695-1712 is not listed on IDEAS
    3. repec:bla:jecsur:v:31:y:2017:i:5:p:1152-1182 is not listed on IDEAS
    4. Dieci, Roberto & Schmitt, Noemi & Westerhoff, Frank, 2018. "Interactions between stock, bond and housing markets," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 43-70.
    5. Dimitri Kroujiline & Maxim Gusev & Dmitry Ushanov & Sergey V. Sharov & Boris Govorkov, 2018. "An Endogenous Mechanism of Business Cycles," Papers 1803.05002, arXiv.org, revised Apr 2018.
    6. repec:eee:ecmode:v:76:y:2019:i:c:p:117-127 is not listed on IDEAS
    7. Kroujiline, Dimitri & Gusev, Maxim & Ushanov, Dmitry & Sharov, Sergey V. & Govorkov, Boris, 2015. "Forecasting stock market returns over multiple time horizons," MPRA Paper 66175, University Library of Munich, Germany.
    8. repec:spr:jeicoo:v:13:y:2018:i:2:d:10.1007_s11403-016-0181-0 is not listed on IDEAS
    9. repec:eee:ecmode:v:75:y:2018:i:c:p:293-304 is not listed on IDEAS

    More about this item

    Keywords

    Logit dynamics; Herding; Microfounded animal spirits; Local and global bifurcations; Post-Keynesian modelling;

    JEL classification:

    • D - Microeconomics
    • D - Microeconomics
    • E - Macroeconomics and Monetary Economics
    • E - Macroeconomics and Monetary Economics

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