Business cycle synchronization in a simple Keynesian macro-model with socially transmitted economic sentiment and international sentiment spill-over

Martin Hohnisch and Frank Westerhoff ()

Structural Change and Economic Dynamics, 2008, vol. 19, issue 3, pages 249-259

Abstract: We propose a simple Keynesian business cycle model in which national income expectations of heterogeneous interacting investors affect their investment decisions. The investors' expectation formation is influenced by their sentiment: investors who hold optimistic views about the future state of the economy expect a higher aggregate demand in the following period and thus invest more than pessimistic investors. The investors' sentiment is, in turn, subject to socio-economic interactions. Simulations show that our model has the potential to generate complex business cycle dynamics. Based on that framework, we provide a three-country model of business cycle synchronization in which spill-over effects on the level of sentiment synchronize national cycles, provided that investors believe that the economies are indeed coupled.

Date: 2008

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Persistent link: http://EconPapers.repec.org/RePEc:eee:streco:v:19:y:2008:i:3:p:249-259

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