Business Confidence and Macroeconomic Dynamics in a Nonlinear Two-Country Framework with Aggregate Opinion Dynamics

Matthieu Charpe, Carl Chiarella, Peter Flaschel and Christian Proaño

No 1401, Working Papers from New School for Social Research, Department of Economics

Abstract: The main objective of the present paper is to investigate explicitly the role of the state of confidence for the macroeconomic dynamics of two interacting economies using the opinion dy- namics approach by Weidlich and Haag (1983) and Lux (1995). Particularly, the overall state of confidence in the world (two-country) economy plays not only for the dynamics of the nominal ex- change rate but also for the dynamics of the real economy through the determination of aggregate investment. This novel feature allows us to consider far richer international macroeconomic inter- actions than most standard models. Further, it features wage-price dynamics that interact with output and employment fluctuations – leading to a Goodwin (1967)-type of distributive cycle –, as well as debt dynamics due to a credit-financed investment behavior. The resulting framework is both advanced as well as flexible enough to generate various types of persistent fluctuations, and also complex dynamics.

Keywords: Macroeconomic (In-)Stability; Business Cycles; Opinion Dynamics; FX Markets (search for similar items in EconPapers)
JEL-codes: E12 E24 E31 E52 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2014-08
New Economics Papers: this item is included in nep-mac
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http://www.economicpolicyresearch.org/econ/2014/NSSR_WP_012014.pdf First version, 2014 (application/pdf)

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