Sentiments and Aggregate Demand Fluctuations

Jess Benhabib, Pengfei Wang and Yi Wen

Econometrica, 2015, vol. 83, 549-585

Abstract: We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self‐fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, nonconvexities, or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.

Date: 2015
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Related works:
Working Paper: Sentiments and aggregate demand fluctuations (2012)
Working Paper: Sentiments and Aggregate Demand Fluctuations (2012)
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