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Firm performance, macroeconomic conditions, and “animal spirits” in a Post Keynesian model of aggregate fluctuations

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  • Shyam Gouri Suresh
  • Mark Setterfield

Abstract

We construct a multi-agent system (MAS) model of cyclical growth in which aggregate fluctuations result from variations in activity at firm level. The latter, in turn, result from changes in “animal spirits” or the state of long run expectations (SOLE) and their effect on firms’ investment behavior. We focus on the impact of publicly-available information about macroeconomic conditions – analogous to the press releases of national statistical agencies – on changes in the SOLE and hence the amplitude of aggregate fluctuations. Our results suggest that the amplitude of fluctuations is reduced by extremes of attention or inattention to aggregate economic performance, but that this relationship is subject to complicated (and possibly complex) phase transitions exhibiting extreme sensitivity to initial conditions.

Suggested Citation

  • Shyam Gouri Suresh & Mark Setterfield, 2014. "Firm performance, macroeconomic conditions, and “animal spirits” in a Post Keynesian model of aggregate fluctuations," Working Papers 14-09, Davidson College, Department of Economics.
  • Handle: RePEc:dav:wpaper:14-09
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    File URL: http://www.tandfonline.com/doi/full/10.1080/01603477.2015.1065676
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    References listed on IDEAS

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    1. Christiansen, Charlotte & Eriksen, Jonas Nygaard & Møller, Stig Vinther, 2014. "Forecasting US recessions: The role of sentiment," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 459-468.
    2. Susanto Basu & Brent Bundick, 2017. "Uncertainty Shocks in a Model of Effective Demand," Econometrica, Econometric Society, vol. 85, pages 937-958, May.
    3. Davidson, Paul, 1988. "A Technical Definition of Uncertainty and the Long-run Non-neutrality of Money," Cambridge Journal of Economics, Oxford University Press, vol. 12(3), pages 329-337, September.
    4. Engelbert Stockhammer & Lucas Grafl, 2010. "Financial Uncertainty and Business Investment," Review of Political Economy, Taylor & Francis Journals, vol. 22(4), pages 551-568.
    5. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    6. Paul Davidson, 1991. "Is Probability Theory Relevant for Uncertainty? A Post Keynesian Perspective," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 129-143, Winter.
    7. Paul Davidson, 1996. "Reality and Economic Theory," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 18(4), pages 479-508, July.
    8. David Dequech, 1999. "Expectations and Confidence under Uncertainty," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 21(3), pages 415-430, March.
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    Cited by:

    1. Mark Setterfield, 2015. "Time variation in the size of the multiplier: a Kalecki-Harrod approach," Working Papers 1522, New School for Social Research, Department of Economics, revised Jan 2017.

    More about this item

    Keywords

    Aggregate fluctuations; cyclical growth; animal spirits; state of long run expectations; sentiment; multi-agent systems;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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