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Behavioural Economics is Useful Also in Macroeconomics: The Role of Animal Spirits

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  • Paul Grauwe

    () (The London School of Economics and Political Science)

  • Yuemei Ji

    () (University College London)

Abstract

Abstract Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations driven by animal spirits. Our discussion includes two applications. One is on the optimal level of inflation targeting under a zero lower bound constraint. The other is on the role of animal spirits in explaining the synchronization of business cycles across countries.

Suggested Citation

  • Paul Grauwe & Yuemei Ji, 2018. "Behavioural Economics is Useful Also in Macroeconomics: The Role of Animal Spirits," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(2), pages 203-216, June.
  • Handle: RePEc:pal:compes:v:60:y:2018:i:2:d:10.1057_s41294-018-0061-9
    DOI: 10.1057/s41294-018-0061-9
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    More about this item

    Keywords

    Animal spirits; Behavioural macroeconomics; Monetary policy; Inflation target; Zero lower bound; Business cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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