Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26463
Authors: 
De Grauwe, Paul
Year of Publication: 
2008
Series/Report no.: 
CESifo working paper 2418
Abstract: 
We develop a behavioral macroeconomic model in which agents use simple but biased rules to forecast future output and inflation. This model generates endogenous waves of optimism and pessimism (Animal Spirits”) that are generated by the correlation of biased beliefs. We contrast the dynamics of this model with a stylized DSGE-version of the model and we study the implications for monetary policies. One of our main results is that strict inflation targeting is suboptimal because it gives more scope for waves of optimism and pessimism to emerge thereby destabilizing output and inflation.
Subjects: 
DSGE-model
imperfect information
heuristics
animal spirits
JEL: 
E10
E32
D83
Document Type: 
Working Paper

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