Sentiments and aggregate demand fluctuations

Jess Benhabib, Pengfei Wang, Yi Wen

    Research output: Contribution to journalArticlepeer-review

    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 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, nonconvexities, 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.

    Original languageEnglish (US)
    Pages (from-to)549-585
    Number of pages37
    JournalEconometrica
    Volume83
    Issue number2
    DOIs
    StatePublished - Mar 1 2015

    Keywords

    • Keynesian self-fulfilling equilibria
    • Sentiments
    • Sunspots

    ASJC Scopus subject areas

    • Economics and Econometrics

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