Animal Spirits in Open Economy: An Interaction-Based Approach to Bounded Rationality

Tae-Seok Jang

No 46, Dynare Working Papers from CEPREMAP

Abstract: In this paper, we develop the waves of optimists and pessimists in an open-economy New Keynesian model á la Gali and Monacelli (2005). We extend the model to include the dynamics of inflation and output generated by the heterogeneous bounded rational agents according to De Grauwe (2011). The effects of social interaction are merged into open DSGE model. In particular, the interaction between heterogeneous agents provides the basis for bounded rational behavior in a two-country model. As a result, the model is able to describe the herding behavior of investors in open economy. The simulation results suggest that the business cycle goes through periods of high volatility when the large number of optimists or pessimists in one country strongly affects a foreign country.

Keywords: animal spirits; bounded rationality; new keynesian; two-country model (search for similar items in EconPapers)
JEL-codes: C63 E31 F41 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-10
New Economics Papers: this item is included in nep-cmp, nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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