Behavioural Economics is Useful Also in Macroeconomics: The Role of Animal Spirits
Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations driven by animal spirits. Our discussion includes two applications. One is on the optimal level of inflation targeting under a zero lower bound constraint. The other is on the role of animal spirits in explaining the synchronization of business cycles across countries.
KeywordsAnimal spirits Behavioural macroeconomics Monetary policy Inflation target Zero lower bound Business cycles
JEL ClassificationE32 E58 E7 F42 F44
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