Cookies?
Library Header Image
LSE Research Online LSE Library Services

Animal spirits and monetary policy

de Grauwe, Paul (2011) Animal spirits and monetary policy. Economic Theory, 47 (2-3). pp. 423-457. ISSN 0938-2259

Full text not available from this repository.
Identification Number: 10.1007/s00199-010-0543-0

Abstract

I develop a behavioral macroeconomic model in which agents have cognitive limitations. As a result, they use simple but biased rules (heuristics) to forecast future output and inflation. Although the rules are biased, agents learn from their mistakes in an adaptive way. Thismodel produces endogenous waves of optimism and pessimism (“animal spirits”) that are generated by the correlation of biased beliefs. I identify the conditions under which animal spirits arise. I contrast the dynamics of this model with a stylized DSGE-version of the model and I study the implications for monetary policies. I find that strict inflation targeting is suboptimal because it gives more scope for waves of optimism and pessimism to emerge thereby destabilizing output and inflation.

Item Type: Article
Official URL: http://www.springer.com/economics/economic+theory/...
Additional Information: © 2011 Springer
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > European Institute
Date Deposited: 07 Aug 2012 08:17
Last Modified: 07 Aug 2012 08:17
URI: http://eprints.lse.ac.uk/id/eprint/45124

Actions (login required)

View Item View Item