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Booms and busts in economic activity: a behavioral explanation

de Grauwe, Paul (2012) Booms and busts in economic activity: a behavioral explanation. Journal of Economic Behavior and Organization, 83 (3). pp. 484-501. ISSN 0167-2681

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Abstract

Booms and busts in economic activity are a regular occurrence. They lead to a strong empirical regularity, i.e. that output gaps and output growth are non-normally distributed. Mainstream macroeconomic models explain this phenomenon by invoking exogenous shocks that are non-normally distributed. This is not a very satisfactory explanation as it shifts our ignorance one step further. I propose an explanation based on a behavioral macroeconomic model, in which agents are assumed to have limited cognitive abilities and thus develop different beliefs. This model produces waves of optimism and pessimism in an endogenous way (animal spirits) and provides for a better (endogenous) explanation of the observed non-normality in output movements. I also analyze the implications for monetary policy.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-econom...
Additional Information: © 2012 Elsevier B.V.
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief
E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
Sets: Departments > European Institute
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 07 Aug 2012 08:30
URL: http://eprints.lse.ac.uk/45128/

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