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Behavioural Economics is Useful Also in Macroeconomics: The Role of Animal Spirits

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Abstract

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.

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Fig. 1
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Source: Authors’ own estimation using data from OECD and IMF, direction of trade

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Notes

  1. In De Grauwe(2012) more complex rules are used, e.g. it is assumed that agents do not know the steady-state output gap with certainty and only have biased estimates of it. This is also the approach taken by Hommes and Lustenhouwer(2016).

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Authors and Affiliations

  1. The London School of Economics and Political Science, London, UK

    Paul De Grauwe

  2. University College London, London, UK

    Yuemei Ji

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  1. Paul De Grauwe
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  2. Yuemei Ji
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Correspondence to Yuemei Ji.

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De Grauwe, P., Ji, Y. Behavioural Economics is Useful Also in Macroeconomics: The Role of Animal Spirits. Comp Econ Stud 60, 203–216 (2018). https://doi.org/10.1057/s41294-018-0061-9

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