SENTIMENTS AND AGGREGATE DEMAND FLUCTUATIONS

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling r...

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Bibliographic Details
Published in:Econometrica 2015-03, Vol.83 (2), p.549-585
Main Authors: Benhabib, Jess, Wang, Pengfei, Wen, Yi
Format: Article
Language:English
Subjects:
Aggregate demand
Aggregate income
Benchmarking
Consumer equilibrium
Decision making models
Demand
Demand shocks
Economic expectations
Economic fluctuations
Economic models
Equilibrium models
Keynesian self‐fulfilling equilibria
Keynesian theory
Keynesianism
Labor supply
Morals
Rational expectations
sentiments
Signal noise
Stochastic processes
Studies
Sunspots
Citations: Items that cite this one
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Summary:We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, nonconvexities, or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.
ISSN:0012-9682
1468-0262
DOI:10.3982/ECTA11085