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Different compositions of aggregate sentiment and their impact on macroeconomic stability

Reiner Franke and Frank Westerhoff ()

Economic Modelling, 2019, vol. 76, issue C, 117-127

Abstract: In recent times a number of agent-based models have been put forward that specify an aggregate sentiment as the difference between optimists and pessimists and let the agents endogenously switch between the two attitudes. The present paper extends this stylized framework by adding a third category, which may be viewed as neutrality. On this basis it then formulates a dynamic three-dimensional Goodwinian model with a special focus on multiple long-run equilibrium positions, which may emerge from just one and very natural nonlinearity in the switching process. The equilibria exhibit the same difference between optimists and pessimists and thus give rise to the same aggregate rate of growth, so that they cannot be distinguished at the macroeconomic level. The feature in which they nevertheless differ is the share of neutral agents. Remarkably, this affects stability. In particular, the trajectories may converge to one of two locally stable equilibrium points, or alternatively to a uniquely determined limit cycle. Coexistence of these attractors is absent in a two-state sentiment dynamics. Generally, the results may also be of interest to empirical business cycle research.

Keywords: Agent-based modelling; Three-state sentiment dynamics; Herding; Multiple attractors; Goodwin cycles (search for similar items in EconPapers)
JEL-codes: C13 E12 E30 (search for similar items in EconPapers)
Date: 2019
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