ANIMAL SPIRITS,HETEROGENEOUS EXPECTATIONS,AND THE AMPLIFICATION AND DURATION OF CRISES |
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| Authors: | Tiziana Assenza William A. Brock Cars H. Hommes |
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| Affiliation: | 1. +390272342483+390272342781;2. Associate Professor, Complexity Lab in Economics (CLE), Department of Economics and Finance, Università Cattolica del Sacro Cuore, Milano, Italy;3. Amsterdam School of Economics, University of Amsterdam, CeNDEF, 1018 WB Amsterdam, The Netherlands;4. 608 263 2989608 262 2033;5. Professor Emeritus, Department of Economics, University of Wisconsin at Madison, Madison, WI 53706;6. Department of Economics, University of Missouri, Columbia, Columbia, MO 65211‐6040 |
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| 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 endogenously among heterogeneous expectation rules, based upon their relative performance. Due to strong nonlinearities, a small fraction of pessimistic traders already has a large aggregate effect, leading to a crisis characterized by high interest rates for loans and low output. Our stylized model illustrates how animal spirits and heterogeneous expectations and, in particular, how coordination on pessimistic expectations amplifies crises and slows down recovery. (JEL E32, D83, D84) |
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