Animal Spirits and Monetary Policy

Paul De Grauwe

No 2418, CESifo Working Paper Series from CESifo

Abstract: We develop a behavioral macroeconomic model in which agents use simple but biased rules to forecast future output and inflation. This model generates endogenous waves of optimism and pessimism (“Animal Spirits”) that are generated by the correlation of biased beliefs. We contrast the dynamics of this model with a stylized DSGE-version of the model and we study the implications for monetary policies. One of our main results is that strict inflation targeting is suboptimal because it gives more scope for waves of optimism and pessimism to emerge thereby destabilizing output and inflation.

Keywords: DSGE-model; imperfect information; heuristics; animal spirits (search for similar items in EconPapers)
JEL-codes: D83 E10 E32 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (15)

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Chapter: Animal Spirits and Monetary Policy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2418

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