Different compositions of aggregate sentiment and their impact on macroeconomic stability
Authored by Frank Westerhoff, Reiner Franke
Date Published: 2019
DOI: 10.1016/j.econmod.2018.07.022
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Abstract
In recent times a number of agent-based models have been put forward
that specify an aggregate sentiment as the difference between optimists
and pessimists and let the agents endogenously switch between the two
attitudes. The present paper extends this stylized framework by adding a
third category, which may be viewed as neutrality. On this basis it then
formulates a dynamic three-dimensional Goodwinian model with a special
focus on multiple long-run equilibrium positions, which may emerge from
just one and very natural nonlinearity in the switching process. The
equilibria exhibit the same difference between optimists and pessimists
and thus give rise to the same aggregate rate of growth, so that they
cannot be distinguished at the macroeconomic level. The feature in which
they nevertheless differ is the share of neutral agents. Remarkably,
this affects stability. In particular, the trajectories may converge to
one of two locally stable equilibrium points, or alternatively to a
uniquely determined limit cycle. Coexistence of these attractors is
absent in a two-state sentiment dynamics. Generally, the results may
also be of interest to empirical business cycle research.
Tags
Agent-based modelling
Dynamics
herd behavior
herding
Three-state sentiment dynamics
Multiple
attractors
Goodwin cycles