Sentiments and Aggregate Demand Fluctuations
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.
We are indebted to George-Maria Angeletos, Larry Christiano, George Evans, Jean-Michel Grandmont, Boyan Jovanovic, Guy Laroque, Gaetano Gaballo, John Leahy, Jennifer Lao, Stephen Morris, Heraklis Polemarchakis, Edouard Schaal, Martin Schneider, Karl Shell, Michal Lukasz Szkup, Laura Veldkamp and Michael Woodford for very enlightening comments. We would like to thank the participants at the conference organized by the International Network on Expectational Cordination at the College de France on June 27-29, 2012 in Paris, and at the Northwestern- Tsinghua Conference on "Financial Frictions, Sentiments and Aggregate Fluctuations" on August 21-24 2012 in Beijing for their valuable insights. In particular, we are grateful for discussions with Gaetano Gaballo which were very helpful. Wang acknowledges the financial support from the Research Grants Council of Hong Kong under project number 693513. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Jess Benhabib & Pengfei Wang & Yi Wen, 2015. "Sentiments and Aggregate Demand Fluctuations," Econometrica, Econometric Society, vol. 83, pages 549-585, 03. citation courtesy of