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Animal Spirits and the Business Cycle: Empirical Evidence from Moment Matching
Author(s) -
Jang TaeSeok,
Sacht Stephen
Publication year - 2016
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12091
Subject(s) - economics , rational expectations , business cycle , new keynesian economics , matching (statistics) , animal spirits , inflation (cosmology) , output gap , moment (physics) , econometrics , pessimism , empirical research , bounded function , keynesian economics , monetary policy , mathematics , psychology , statistics , philosophy , physics , mathematical analysis , epistemology , classical mechanics , theoretical physics , social psychology
In this article, we empirically examine a hybrid New‐Keynesian model with heterogeneous bounded rational agents who may adopt an optimistic or pessimistic attitude—so called animal spirits—toward future movements of the output and inflation gap. The model is estimated via the simulated method of moments using Euro Area data from 1975Q1 to 2009Q4. In addition, we compare its empirical performance to the standard model with rational expectations. Our empirical results show that the model‐generated auto‐ and cross‐covariances of the output, inflation and nominal interest rate gap can provide a good approximation of the empirical second moments.