Animal Spirit, Financial Shock and Business Cycle
Keywords:
business cycle, animal spirit, financial shock, news shockAbstract
The study explores integrating psychological factors into business cycle theory through behavioral economics. It introduces animal spirits within a financial accelerator based DSGE model involving seven sectors. Results reveal that these animal spirits impact the macro economy by affecting corporate net worth, where positive news stimulates growth in net worth, employment, and output. Additionally, people's initial reaction to news weakens the effects of anticipated shocks. Simulated models with news shocks highlight distinct impacts of monetary and fiscal policies. In scenarios with news shocks, not only monetary policy drives noticeable economic adjustments, but also fiscal policy significantly moderates the economy. Recommendations stress the importance of considering expected factors in policy formulation, advocating proactive fiscal approaches alongside cautious monetary policies to foster growth while curbing potential financial crises due to bubble expansion. This research provides a fresh theoretical framework for governmental policy decisions.
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