Template-Type: ReDIF-Paper 1.0
Author-Name: Tiziana Assenza 
Author-X-Name-First: Tiziana 
Author-X-Name-Last: Assenza
Author-Email: tiziana.assenza@unicatt.it
Author-Workplace-Name: Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore
Author-Name: William Brock 
Author-X-Name-First: William 
Author-X-Name-Last: Brock
Author-Email: wbrock@ssc.wisc.edu
Author-Workplace-Name: Economics Department,University of Winsconsin, Madison
Author-Name: Cars Hommes 
Author-X-Name-First: Cars 
Author-X-Name-Last: Hommes
Author-Email: C.H.Hommes@uva.nl
Author-Workplace-Name: CeNDEF,University of Amsterdam
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.
Length: 37
Creation-Date: 2013-12
File-URL: http://dipartimenti.unicatt.it/economia-finanza-def0007.pdf
File-Format: Application/pdf
File-Function: First version, 2013
Number: def0007
Classification-JEL: E32 D83 D84
Keywords: Heterogeneous Expectations, Crises, Animal Spirits.
Handle: RePEc:ctc:serie1:def0007