Sentiment-driven business cycle dynamics: An elementary macroeconomic model with animal spirits

Laura Gardini, Davide Radi, Noemi Schmitt, Iryna Sushko, Frank Westerhoff

Risultato della ricerca: Contributo in rivistaArticolo in rivista

Abstract

We propose an elementary macroeconomic model with animal spirits in which aggregate investment expenditure depends on firms’ sentiment. Firms display one of three sentiment states. When national income increases (decreases) strongly, firms are optimistic (pessimistic) and aggregate investment expenditure is high (low). Otherwise, firms are neutral and aggregate investment expenditure is normal. A rigorous mathematical analysis of our elementary macroeconomic model sheds new light on how animal spirits may contribute to fluctuations in economic activity. In particular, we show that a bidirectional feedback process between national income and investor sentiment may create endogenous business cycles that coevolve with waves of optimism and pessimism.
Lingua originaleEnglish
pagine (da-a)342-359
Numero di pagine18
RivistaJOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION
Volume210
DOI
Stato di pubblicazionePubblicato - 2023

Keywords

  • Animal spirits
  • Business cycle dynamics
  • Investor sentiment
  • Macroeconomics
  • Mathematical economics
  • Nonlinear dynamical systems

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