Booms and busts in economic activity: A behavioral explanation

By P. Grauwe. 2012

143 citations recorded by the source corpus.

Booms and busts in economic activity are a regular occurrence. They lead to a strong empirical regularity, i.e. that output gaps and output growth are non-normally distributed. Mainstream macroeconomic models explain this phenomenon by invoking exogenous shocks that are non-normally distributed. This is not a very satisfactory explanation as it shifts our ignorance one step further. I propose an explanation based on a behavioral macroeconomic model, in which agents are assumed to have limited cognitive abilities and thus develop different beliefs. This model produces waves of optimism and pessimism in an endogenous way (animal spirits) and provides for a better (endogenous) explanation of the observed non-normality in output movements. I also analyze the implications for monetary policy.

View Paper: https://www.semanticscholar.org/paper/a74ee6be9eb568d58f15034db66b5fdd993d5c02

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1. P. Gelain
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Citations in the corpus

• FAT-TAIL DISTRIBUTIONS AND BUSINESS-CYCLE MODELS (2013, unknown): “Another possible route is to relax the rational-expectation assumption as in De Grauwe (2012).”
• House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy (2013, background): “Alternatively, we could interpret ! as the probability weight that a single agent type assigns to the moving-average rule when constructing a one-period-ahead forecast, along the lines of De Grauwe (2012).”