Sentiment-driven business cycle dynamics: An elementary macroeconomic model with animal spirits

Laura Gardini, Davide Radi, Noemi Schmitt, Iryna Sushko and Frank Westerhoff

Journal of Economic Behavior & Organization, 2023, vol. 210, issue C, 342-359

Abstract: We propose an elementary macroeconomic model with animal spirits in which aggregate investment expenditure depends on firms’ sentiment. Firms display one of three sentiment states. When national income increases (decreases) strongly, firms are optimistic (pessimistic) and aggregate investment expenditure is high (low). Otherwise, firms are neutral and aggregate investment expenditure is normal. A rigorous mathematical analysis of our elementary macroeconomic model sheds new light on how animal spirits may contribute to fluctuations in economic activity. In particular, we show that a bidirectional feedback process between national income and investor sentiment may create endogenous business cycles that coevolve with waves of optimism and pessimism.

Keywords: Macroeconomics; Business cycle dynamics; Investor sentiment; Animal spirits; Mathematical economics; Nonlinear dynamical systems (search for similar items in EconPapers)
JEL-codes: E12 E32 E71 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:210:y:2023:i:c:p:342-359

DOI: 10.1016/j.jebo.2023.04.012

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