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Animal Spirits in Open Economy: An Interaction-Based Approach to Bounded Rationality

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  • Jang, Tae-Seok

Abstract

In this paper, we develop the waves of optimists and pessimists in an open-economy New Keynesian model á la Gali and Monacelli (2005). We extend the model to include the dynamics of inflation and output generated by the heterogeneous bounded rational agents according to De Grauwe (2011). The effects of social interaction are merged into open DSGE model. In particular, the interaction between heterogeneous agents provides the basis for bounded rational behavior in a two-country model. As a result, the model is able to describe the herding behavior of investors in open economy. The simulation results suggest that the business cycle goes through periods of high volatility when the large number of optimists or pessimists in one country strongly affects a foreign country.

Suggested Citation

  • Jang, Tae-Seok, 2015. "Animal Spirits in Open Economy: An Interaction-Based Approach to Bounded Rationality," Dynare Working Papers 46, CEPREMAP.
    • Handle: RePEc:cpm:dynare:046
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    Cited by:

    1. Jump, Robert Calvert & Levine, Paul, 2019. "Behavioural New Keynesian models," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 59-77.

    More about this item

    Keywords

    animal spirits; bounded rationality; new keynesian; two-country model;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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