Animal Spirit, Financial Shock and Business Cycle

Furui Pang

European Journal of Business, Economics & Management, 2025, vol. 1, issue 2, 15-24

Abstract: The study explores integrating psychological factors into business cycle theory through behavioral economics. It introduces animal spirits within a financial accelerator based DSGE model involving seven sectors. Results reveal that these animal spirits impact the macro economy by affecting corporate net worth, where positive news stimulates growth in net worth, employment, and output. Additionally, people's initial reaction to news weakens the effects of anticipated shocks. Simulated models with news shocks highlight distinct impacts of monetary and fiscal policies. In scenarios with news shocks, not only monetary policy drives noticeable economic adjustments, but also fiscal policy significantly moderates the economy. Recommendations stress the importance of considering expected factors in policy formulation, advocating proactive fiscal approaches alongside cautious monetary policies to foster growth while curbing potential financial crises due to bubble expansion. This research provides a fresh theoretical framework for governmental policy decisions.

Keywords: business cycle; animal spirit; financial shock; news shock (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://pinnaclepubs.com/index.php/EJBEM/article/view/147/149 (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:dba:ejbema:v:1:y:2025:i:2:p:15-24

Access Statistics for this article

More articles in European Journal of Business, Economics & Management from Pinnacle Academic Press
Bibliographic data for series maintained by Joseph Clark ().