NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sentiments and Aggregate Demand Fluctuations

Jess Benhabib, Pengfei Wang, Yi Wen

NBER Working Paper No. 18413
Issued in September 2012
NBER Program(s):   EFG

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfillng rational expectations equilibria in standard economies without aggregate shocks, externalities, persistent informational frictions, or even any strategic complementarity. Our general equilibrium model is deliberately simple, but could serve as a benchmark for more complicated equilibrium models with additional features.

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