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TAKING STOCK: A RIGOROUS MODELLING OF ANIMAL SPIRITS IN MACROECONOMICS

Reiner Franke and Frank Westerhoff ()

Journal of Economic Surveys, 2017, vol. 31, issue 5, 1152-1182

Abstract: This paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro†dynamic models that can capture some of its crucial aspects in a rigorous way. Two approaches are considered: the discrete choice and the transition probability approach, where individual agents face a binary decision and choose one of them with a certain probability. These assessments are adjusted upward or downward in response to what the agents observe, which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions. Typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits. On the whole, the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework.

Date: 2017
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