Animal spirits and monetary policy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. Terms of use: Documents in EconStor mayJEL Code: E10, E32, D83.

Monetary Policy Under Behavioral Expectations: Theory and Experiment

“…It is exactly via the dependence of expectations on (past) actual variables that reacting to the output gap can also pay off in terms of inflation volatility. To illustrate this, imagine inflation and output gap staying constant atπ and y and a combination of shocks arriving in one period that would lead (without any 10 Similar results also arise in a different macroeconomic model when employing simplistic behavioral rules of expectation formation (De Grauwe, 2011, 2012a. Such a non-monotonic trade-off between inflation and output gap volatility can also arise in sticky information economies in which the degree of attentiveness or the rate at which agents update their information is endogenized reaction by the central bank) to inflation staying constant and the output gap being above the steady state level.…”

“…Bullard and Mitra (2002), Marcet and Nicolini (2003), Guesnerie (2009, 2010, Woodford (2010), De Grauwe (2011, 2012a,b), De Grauwe and Kaltwasser (2012, Anufriev et al (2013), Kurz et al (2013), Benhabib et al (2014; see Evans and Honkapohja (2001) and Woodford (2013) for overviews).…”

Optimal policy identification: Insights from the German electricity market

“…We find ABM better fitting our research problem in comparison to more traditional techniques (like DSGE models) because we avoid presuming unrealistic cognitive capabilities of our agents (De Grauwe, 2011), given the uncertainty related to constantly changing prices of fossil and REGT electricity but also unforeseeable stochastic events (e.g., emergence of the small scale storage technology). Furthermore, we aim to address income inequality and interaction among heterogeneous agents, which would have been incompatible with the traditional representative agent assumption (Fagiolo and Roventini, 2012, p. 84).…”

Optimal monetary policy in a new Keynesian model with animal spirits and financial markets

“…Consult Lengnick (2013) for a simple example and Dosi et al (2010) for a very elaborate, policy oriented one. 3 De Grauwe (2010a), De Grauwe (2010c), De Grauwe (2010b).…”