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Aggregate sentiment dynamics: A canonical modelling approach and its pleasant nonlinearities

Reiner Franke

Structural Change and Economic Dynamics, 2014, vol. 31, issue C, 64-72

Abstract: The paper is an attempt at an alternative to the rational expectations assumption in macroeconomic modelling. Emphasizing the concept of sentiment in contrast to the expectations of a single selected variable, it is meant to take an important step forward towards a canonical heterodox framework for the microfounded modelling of irreducible uncertainty and, specifically, herding. Referring to a large population of agents who repeatedly face a binary decision problem, two stylized approaches are considered to describe the aggregate sentiment dynamics: the transition probability and the discrete choice approach. After a slight modification of the latter, the two specifications are shown to give rise to essentially the same adjustment equations. In addition to these conceptual issues, a two-dimensional prototype model is put forward which can illustrate the rich potential of an inherent nonlinearity to generate scenarios with single and multiple (point and set) attractors.

Keywords: Logit dynamics; Herding; Microfounded animal spirits; Local and global bifurcations; Post-Keynesian modelling (search for similar items in EconPapers)
JEL-codes: D D E E (search for similar items in EconPapers)
Date: 2014
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Handle: RePEc:eee:streco:v:31:y:2014:i:c:p:64-72