Booms and Busts: New Keynesian and Behavioral Explanations

Paul De Grauwe

No 3293, CESifo Working Paper Series from CESifo

Abstract: Capitalism is characterized by booms and busts. Periods of strong growth in output alternate with periods of declines in economic growth. Every macro-economic theory should attempt to explain these endemic business cycle movements. In this paper I present two paradigms that attempt to explain these booms and busts. One is the DSGE-paradigm in which agents have unlimited cognitive abilities. The other paradigm is a behavioural one in which agents are assumed to have limited cognitive abilities. These two types of models produce a radically different macroeconomic dynamics. I analyze these differences. I also study the different policy implications of these two paradigms.

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: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Chapter: Booms and busts: New Keynesian and behavioural explanations (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_3293

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