Uncertainty and Sentiment-Driven Equilibria [report]

Jess Benhabib, Pengfei Wang, Yi Wen
2013 unpublished
We construct a model to capture the Keynesian idea that production and employment decisions are based on expectations of aggregate demand driven by sentiments and that realized demand follows from the production and employment decisions of ...rms. We cast the Keynesian idea into a simple model with imperfect information about aggregate demand and we characterize the rational expectations equilibria of this model. We ...nd that the equilibrium is not unique despite the absence of any
more » ... ies or strategic complementarity in the model. In addition to multiple fundamental equilibria, there can be serially correlated stochastic equilibria driven by self-ful...lling consumer sentiments. Furthermore, these sentiment-driven equilibria are not based on randomizations of the fundamental equilibria. Most, probably, our decisions to do something positive, the full consequences of which will be drawn over many days to come, can only be taken as a result of animal spirits-of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative bene...ts multiplied by quantitative probabilities. J. M. Keynes, General Theory
doi:10.20955/wp.2013.011 fatcat:hxoce3ynrfbazb2arzyhjnnqkq