In mainstream economics, and particularly in New Keynesian
macroeconomics, the booms and busts that characterize capitalism
arise because of large external shocks. The combination of these
shocks and the slow adjustments of wages and prices by rational
agents leads to cyclical movements. In this book, Paul De Grauwe
argues for a different macroeconomics model--one that works with an
internal explanation of the business cycle and factors in agents'
limited cognitive abilities. By creating a behavioral model that is
not dependent on the prevailing concept of rationality, De Grauwe
is better able to explain the fluctuations of economic activity
that are an endemic feature of market economies. This new approach
illustrates a richer macroeconomic dynamic that provides for a
better understanding of fluctuations in output and inflation.
De Grauwe shows that the behavioral model is driven by
self-fulfilling waves of optimism and pessimism, or animal spirits.
Booms and busts in economic activity are therefore natural outcomes
of a behavioral model. The author uses this to analyze central
issues in monetary policies, such as output stabilization, before
extending his investigation into asset markets and more
sophisticated forecasting rules. He also examines how well the
theoretical predictions of the behavioral model perform when
confronted with empirical data. Develops a behavioral macroeconomic
model that assumes agents have limited cognitive abilities Shows
how booms and busts are characteristic of market economies Explores
the larger role of the central bank in the behavioral model
Examines the destabilizing aspects of asset markets
General
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