Sentiments and Aggregate Demand Fluctuations
NBER Working Paper No. 18413
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 demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, non-convexities or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.
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This paper was revised on October 16, 2014
Document Object Identifier (DOI): 10.3386/w18413
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