Working Paper: NBER ID: w18413
Authors: Jess Benhabib; Pengfei Wang; Yi Wen
Abstract: We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, non-convexities or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.
Keywords: Keynesian; self-fulfilling equilibria; sentiments; sunspots
JEL Codes: D8; D84; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate demand driven by sentiments (E00) | output fluctuations (E39) |
| noisy signals regarding aggregate demand (E19) | firms' production decisions (D21) |
| firms' production decisions (D21) | output fluctuations (E39) |
| perceived aggregate demand uncertainty (D89) | firms' output decisions (D21) |
| self-fulfilling equilibrium (D50) | fluctuations in output and employment (E32) |
| self-fulfilling equilibrium (D50) | mean output (E23) |