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Comparative Economic Studies

, Volume 60, Issue 2, pp 203–216 | Cite as

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

  • Paul De Grauwe
  • Yuemei Ji
Article

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.

Keywords

Animal spirits Behavioural macroeconomics Monetary policy Inflation target Zero lower bound Business cycles 

JEL Classification

E32 E58 E7 F42 F44 

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Copyright information

© Association for Comparative Economic Studies 2018

Authors and Affiliations

  1. 1.The London School of Economics and Political ScienceLondonUK
  2. 2.University College LondonLondonUK

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