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Sentiments and aggregate demand fluctuations

Jess Benhabib (), Pengfei Wang () and Yi Wen ()

No 2012-039, Working Papers from Federal Reserve Bank of St. Louis

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 un- der imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without aggregate shocks, externalities, persistent informational frictions, or even any strategic comple- mentarity. Our general equilibrium model is deliberately simple, but could serve as a benchmark for more complicated equilibrium models with additional features.

Keywords: Keynesian economics; Equilibrium (Economics) (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-bec, nep-dge, nep-hpe and nep-mac
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Related works:
Journal Article: Sentiments and Aggregate Demand Fluctuations (2015) Downloads
Working Paper: Sentiments and Aggregate Demand Fluctuations (2012) Downloads
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