Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/89695
Authors: 
De Grauwe, Paul
Macchiarelli, Corrado
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper 4480
Abstract: 
In this paper we extend the behavioral macroeconomic model as proposed by De Grauwe (2012) to include a banking sector. The behavioral model takes the view that agents have limited cognitive limitations. As a result, it is rational to use simple forecasting rules and to subject the use of these rules to a fitness test. Agents then are driven to select the rule that performs best. The behavioral model produces endogenous and self-fulfilling movements of optimism and pessimism (animal spirits). Our main result is that the existence of banks intensifies these movements, creating a greater scope for booms and busts. Thus banks do not create but amplify animal spirits. The policy conclusion we derive from this result is that the central bank has an important responsibility for stabilizing output. Output stabilization is an instrument to “tame the animal spirits”. This has the effect of improving the tradeoff between inflation and output volatility.
Subjects: 
animal spirits
credit cycle
interest rate spread
stabilization
JEL: 
E40
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.