Uncertainty and Sentiment-Driven Equilibria
Jess Benhabib,
Pengfei Wang and
Yi Wen
Chapter Chapter 12 in Sunspots and Non-Linear Dynamics, 2017, pp 281-304 from Springer
Abstract:
Abstract We construct a simple neoclassical model to capture the Keynesian idea that equilibrium aggregate supply is determined by aggregate demand and thus influenced by consumer sentiments about aggregate income. This result is nontrivial because in a standard neoclassical setting it is the aggregate supply (productive capacity) that determines aggregate demand, instead of the other way around, through factor-income shares and market-clearing mechanisms. However, we show that when firms’ production and employment decisions must be based on expectations of aggregate demand and that realized demand follows from firms’ production and employment decisions through market-clearing mechanisms, rational expectations about aggregate demand can lead to stochastic sentiment-driven equilibria despite the absence of production externalities, incomplete financial markets, strategic complementarity or any non-convexities in the model. The key is imperfect information arising naturally from the fact that production and employment decisions by firms, and consumption and labor supply decisions by households, are all made prior to goods being produced and exchanged, and before market clearing prices are realized. The sentiment-driven equilibria in our model are not based on randomizations over multiple fundamental equilibria as in many sunspot-driven business cycle models.
Keywords: Keynesian self-fulfilling equilibria; Sentiments; Extrinsic uncertainty; Sunspots; D8; D84; E3; E32 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (2)
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
Related works:
Working Paper: Uncertainty and sentiment-driven equilibria (2013) 
Working Paper: Uncertainty and Sentiment-Driven Equilibria (2013) 
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:spr:steccp:978-3-319-44076-7_12
Ordering information: This item can be ordered from
http://www.springer.com/9783319440767
DOI: 10.1007/978-3-319-44076-7_12
Access Statistics for this chapter
More chapters in Studies in Economic Theory from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().