Working Paper
Sentiments and aggregate demand fluctuations
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 un- der imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without aggregate shocks, externalities, persistent informational frictions, or even any strategic comple- mentarity. Our general equilibrium model is deliberately simple, but could serve as a benchmark for more complicated equilibrium models with additional features.
https://doi.org/10.20955/wp.2012.039
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Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2012
Number: 2012-039