de Grauwe, Paul 
ORCID: 0000-0001-5225-1301
(2011)
Animal spirits and monetary policy.
Economic Theory, 47 (2-3).
pp. 423-457.
ISSN 0938-2259
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 |
| Divisions: | European Institute |
| Subjects: | H Social Sciences > HB Economic Theory |
| JEL classification: | 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 |
| Date Deposited: | 07 Aug 2012 08:17 |
| Last Modified: | 12 Dec 2024 00:00 |
| URI: | http://eprints.lse.ac.uk/id/eprint/45124 |
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