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TAKING STOCK: A RIGOROUS MODELLING OF ANIMAL SPIRITS IN MACROECONOMICS
Author(s) -
Franke Reiner,
Westerhoff Frank
Publication year - 2017
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/joes.12219
Subject(s) - animal spirits , economics , macro , flexibility (engineering) , stock (firearms) , econometrics , aggregate (composite) , discrete choice , mathematical economics , computer science , mechanical engineering , psychology , social psychology , materials science , management , engineering , composite material , programming language
This paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro‐dynamic models that can capture some of its crucial aspects in a rigorous way. Two approaches are considered: the discrete choice and the transition probability approach, where individual agents face a binary decision and choose one of them with a certain probability. These assessments are adjusted upward or downward in response to what the agents observe, which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions. Typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits. On the whole, the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework.