Year: 2015 Volume: 9 Issue: 2 Pages: 104-134
Abstract: The paper investigates the dynamics of a model of sentiment switching. The model is built upon rumor propagation theory and it is designed to uncover, for a given population, the social process through which optimistic individuals might become pessimistic or the other way around. The outcome is a scenario of perpetual motion with the shares of optimistic and pessimistic agents varying persistently over time. On a second stage, the cyclical sentiments setup is attached to a mechanism of formation of expectations based on the notion of optimized rationality, leading to a description of the macro economy in which aggregate output and inflation exhibit sentiment driven fluctuations. The proposed model contributes to a recent strand of macroeconomic literature that recovers the Keynesian notions of animal spirits, market sentiments and waves of optimism and pessimism.
JEL classification: E32, E37, D83, D84
Keywords: sentiments, animal spirits, business cycles, rumor propagation, New-Keynesian macroeconomics, optimized rationality
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