The Origins and Propagation of Animal Spirits Shocks

Makoto Nirei and Xavier Ragot
Additional contact information
Makoto Nirei: Faculty of Economics, the University of Tokyo
Xavier Ragot: Department of Economics, Sciences Po

No CIRJE-F-1263, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper presents a business cycle model where animal spirits shocks, originating from idiosyncratic productivity shocks, drive the comovement of investment, consumption, hours worked, and inflation. In the fully characterized comovement mechanism, real wage rigidity and diminishing returns to labor, resulting from the presence of capital, play a crucial role: a positive investment demand shock raises labor demand, decreases the marginal product of labor, and increases the marginal cost of producing final goods. Our model features a firm’s lumpy investment, leading to a state-dependent multiplier effect, which depends on the firm’s capital profile within an inaction band. Lumpy investments, propagated through the aggregate demand externality, generate an investment avalanche. This offers a microfoundation for our animal spirits shocks and produces aggregate fluctuations without assuming exogenous aggregate shocks.Additionally, by including a time-to-build process for capital formation, the model can explain the autocorrelation structure.

Pages: 67 pages
Date: 2025-12
New Economics Papers: this item is included in nep-mac
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cirje.e.u-tokyo.ac.jp/research/dp/2025/2025cf1263.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2025cf1263

Access Statistics for this paper

More papers in CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo Contact information at EDIRC.
Bibliographic data for series maintained by CIRJE administrative office ().