Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/46377
Authors: 
De Grauwe, Paul
Year of Publication: 
2010
Series/Report no.: 
CESifo working paper: Fiscal Policy, Macroeconomics and Growth 3293
Abstract: 
Capitalism is characterized by booms and busts. Periods of strong growth in output alternate with periods of declines in economic growth. Every macro-economic theory should attempt to explain these endemic business cycle movements. In this paper I present two paradigms that attempt to explain these booms and busts. One is the DSGE-paradigm in which agents have unlimited cognitive abilities. The other paradigm is a behavioural one in which agents are assumed to have limited cognitive abilities. These two types of models produce a radically different macroeconomic dynamics. I analyze these differences. I also study the different policy implications of these two paradigms.
Subjects: 
DSGE-model
imperfect information
heuristics
animal spirits
JEL: 
E10
E32
D83
Document Type: 
Working Paper

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