Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2013-12-17
Number: 13-205/II
Author-Name: Tiziana Assenza
Author-Workplace-Name: Università Cattolica del Sacro Cuore, Milano, and University of Amsterdam, CeNDEF, The Netherlands
Author-Name: William A. Brock
Author-Workplace-Name: University of Wisconsin, Madison, USA, and University of Missouri, Columbia
Author-Name: Cars H. Hommes
Author-Workplace-Name: University of Amsterdam, CeNDEF, and Tinbergen Institute, The Netherlands
Title: Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts
Abstract: We introduce a simple equilibrium model of a market for loans, where households lend to firms based on heterogeneous expectations about their loan default
probability. Agents select among heterogeneous expectation rules, based upon their relative performance. A small fraction of pessimistic traders already has a large aggregate effect, leading to a crisis characterized by high contract rates for loans and low output. Our stylized model illustrates how animal spirits and heterogeneous expectations amplify boom and bust cycles and how endogenous
coordination on pessimistic expectations amplifies crises and slows down recovery.
Taking heterogeneous expectations and bounded rationality into account is crucial for the timing of monetary or fiscal policy.
Classification-JEL: E32, D83, D84
Keywords: Heterogeneous Expectations, Crises, Animal Spirits
File-Url: https://papers.tinbergen.nl/13205.pdf
File-Format: application/pdf
File-Size: 645543 bytes
Handle: RePEc:tin:wpaper:20130205