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Sentiments and aggregate demand fluctuations

Author

Listed:
  • Jess Benhabib
  • Pengfei Wang
  • Yi Wen

Abstract

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made un- der imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without aggregate shocks, externalities, persistent informational frictions, or even any strategic comple- mentarity. Our general equilibrium model is deliberately simple, but could serve as a benchmark for more complicated equilibrium models with additional features.

Suggested Citation

  • Jess Benhabib & Pengfei Wang & Yi Wen, 2012. "Sentiments and aggregate demand fluctuations," Working Papers 2012-039, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2012-039
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    References listed on IDEAS

    as
    1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
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    More about this item

    Keywords

    Keynesian economics; Equilibrium (Economics);

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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