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Animal Spirits and Monetary Policy

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  • Paul De Grauwe

Abstract

We develop a behavioral macroeconomic model in which agents use simple but biased rules to forecast future output and inflation. This model generates endogenous waves of optimism and pessimism (“Animal Spirits”) that are generated by the correlation of biased beliefs. We contrast the dynamics of this model with a stylized DSGE-version of the model and we study the implications for monetary policies. One of our main results is that strict inflation targeting is suboptimal because it gives more scope for waves of optimism and pessimism to emerge thereby destabilizing output and inflation.

Suggested Citation

  • Paul De Grauwe, 2008. "Animal Spirits and Monetary Policy," CESifo Working Paper Series 2418, CESifo.
    • Handle: RePEc:ces:ceswps:_2418
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    Cited by:

    1. Andreas Hoffmann, 2010. "An Overinvestment Cycle In Central And Eastern Europe?," Metroeconomica, Wiley Blackwell, vol. 61(4), pages 711-734, November.
    2. Branch, William A. & McGough, Bruce, 2010. "Dynamic predictor selection in a new Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1492-1508, August.
    3. Piero Ferri, 2013. "Income distribution and debts in a fragile economy: market processes and macro constraints," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(2), pages 219-230, October.
    4. Piero Ferri & AnnaMaria Variato, 2010. "Financial Fragility, the Minskian Triad, and Economic Dynamics," International Journal of Political Economy, Taylor & Francis Journals, vol. 39(2), pages 70-82.
    5. Skeie, David R., 2010. "Comment," LSE Research Online Documents on Economics 123269, London School of Economics and Political Science, LSE Library.
    6. Augusto de la Torre & Alain Ize, 2010. "Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2010), pages 25-64, August.
    7. John Knight & Sai Ding, 2010. "Why Does China Invest So Much?," Asian Economic Papers, MIT Press, vol. 9(3), pages 87-117, Fall.
    8. Lena Dräger, 2011. "Endogenous Persistence with Recursive Inattentiveness," Macroeconomics and Finance Series 201103, University of Hamburg, Department of Socioeconomics.
    9. Roberto Veneziani & Luca Zamparelli & Corrado Di Guilmi, 2017. "The Agent-Based Approach To Post Keynesian Macro-Modeling," Journal of Economic Surveys, Wiley Blackwell, vol. 31(5), pages 1183-1203, December.
    10. Piero Ferri & Annalisa Cristini & Anna Maria Variato, 2019. "Growth, unemployment and heterogeneity," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(3), pages 573-593, September.
    11. Anufriev, Mikhail & Assenza, Tiziana & Hommes, Cars & Massaro, Domenico, 2013. "Interest Rate Rules And Macroeconomic Stability Under Heterogeneous Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 17(8), pages 1574-1604, December.
    12. Jean-Philippe Bouchaud & Stanislao Gualdi & Marco Tarzia & Francesco Zamponi, 2018. "Optimal inflation target: insights from an agent-based model," Post-Print hal-01768441, HAL.
    13. Augusto De La Torre & Alain Ize, 2010. "Regulatory Reform: Integrating Paradigms," International Finance, Wiley Blackwell, vol. 13(1), pages 109-139, March.
    14. Lena Dräger, 2010. "Why don't people pay attention? Endogenous Sticky Information in a DSGE Model," Macroeconomics and Finance Series 201002, University of Hamburg, Department of Socioeconomics.
    15. Lena Draeger, 2010. "Why Don't People Pay Attention?," KOF Working papers 10-260, KOF Swiss Economic Institute, ETH Zurich.
    16. Piero Ferri & Steve Fazzari & Edward Greenberg & Anna Variato, 2011. "Aggregate Demand, Harrod’s Instability and Fluctuations," Computational Economics, Springer;Society for Computational Economics, vol. 38(3), pages 209-220, October.
    17. Bouchaud, Jean-Philippe & Gualdi, Stanislao & Tarzia, Marco & Zamponi, Francesco, 2018. "Optimal inflation target: Insights from an agent-based model," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 12, pages 1-27.

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    More about this item

    Keywords

    DSGE-model; imperfect information; heuristics; animal spirits;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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