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Sentiment-driven limit cycles and chaos

Author

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  • Orlando Gomes

    (Lisbon Accounting and Business School (ISCAL-IPL) and Business Research Unit (BRU-IUL))

  • J. C. Sprott

    (University of Wisconsin-Madison)

Abstract

A recent strand of macroeconomic literature has placed sentiment fluctuations at the forefront of the academic debate about the foundations of business cycles. Waves of optimism and pessimism influence the decisions of investors and consumers, and they might therefore be interpreted as a driving force for the performance of the economy in the short term. In this context, two questions regarding the formation and evolution of psychological moods in an economic setting gain relevance: First, how can we model the process of transmission of sentiments across economic agents? Second, is this process capable of generating endogenous and persistent fluctuations? This paper answers these two questions by proposing a simple and intuitive continuous-time dynamic sentiment spreading model based on the rumor propagation literature. As agents contact with one another, endogenous fluctuations are likely to emerge, with trajectories of sentiment shares potentially exhibiting periodic cycles and chaotic behavior.

Suggested Citation

  • Orlando Gomes & J. C. Sprott, 2017. "Sentiment-driven limit cycles and chaos," Journal of Evolutionary Economics, Springer, vol. 27(4), pages 729-760, September.
  • Handle: RePEc:spr:joevec:v:27:y:2017:i:4:d:10.1007_s00191-017-0497-5
    DOI: 10.1007/s00191-017-0497-5
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    Cited by:

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    2. 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.
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    More about this item

    Keywords

    Sentiments; Waves of optimism and pessimism; Endogenous fluctuations; Limit cycles; Chaos;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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