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Animal Spirits and Investment Complementarities in a Temporary Equilibrium model with Underemployment


  • Polat, Sezgin

    () (Galatasaray University Economic Research Center)


This paper proposes a sequential macroeconomic model to study investment complementarities in the presence of un(der)employment. It also incorporates some assumptions generally used in Keynesian economics like animal spirits, cash-in-advance constraints and irreversibility of investment decisions. The construction of the model puts special emphasis on the role of investment decisions in the formation of business cycles.Our results provide support to the view that wage flexibility does not promise neither to dampen expectation-driven economic fluctuations nor to shorten the adjustment period. In the fix-price equilibrium, there appears a trade-of between unemployment and output volatility. When the wage formation is less sensitive to changes in past level of unemployment, less pronounced, the output volatility and more pronounced the unemployment volatility

Suggested Citation

  • Polat, Sezgin, 2010. "Animal Spirits and Investment Complementarities in a Temporary Equilibrium model with Underemployment," GIAM Working Papers 10-1, Galatasaray University Economic Research Center, revised 2010.
  • Handle: RePEc:ris:giamwp:2010_001

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    Complementarites; Animal Spirits; Sequential Model; Fluctuations;

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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