Working Paper: NBER ID: w18878
Authors: Jess Benhabib; Pengfei Wang; Yi Wen
Abstract: 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 firms. 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 find that the equilibrium is not unique despite the absence of any non-convexities or strategic complementarity in the model. In addition to multiple fundamental equilibria, there can be serially correlated stochastic equilibria driven by self-fulfilling consumer sentiments. Furthermore, these sentiment-driven equilibria are not based on randomizations of the fundamental equilibria
Keywords: Keynesian economics; consumer sentiments; equilibria
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 |
|---|---|
| consumer sentiments (D12) | production decisions (L23) |
| consumer sentiments (D12) | employment decisions (M51) |
| production decisions (L23) | actual demand outcomes (D12) |
| consumer sentiments (D12) | realized demand (R22) |
| consumer sentiments (D12) | multiple equilibria (D50) |
| expectations about aggregate demand (E00) | production decisions (L23) |
| expectations about aggregate demand (E00) | employment decisions (M51) |