Animal spirits, investment and unemployment: An old Keynesian view of the Great Recession

• Main Author: Marco Guerrazzi
• Format: Article
• Language: English
• Published: Elsevier 2015-09-01
• Series: EconomiA
• Subjects: Investment; Capital accumulation; Finance-induced recession; Search; DSGE models
• Online Access: http://www.sciencedirect.com/science/article/pii/S1517758015000351

This paper develops a DSGE model with investment and capital accumulation build along demand-driven explanations of the Great Recession. Specifically, following Farmer (2013), I set forth a search framework in which households decide about consumption while firms decide about recruiting effort as well as investment. This setting closed with market clearing in good and asset markets has one less equation than unknowns. As a consequence, in order to solve such an indeterminacy, I assume that investment is driven by self-fulfilling expectations about the adjustment cost of capital. Consistently with the view of business cycles pushed by stock price fluctuations, this model has the potential to provide a more comprehensive rationale for the consumption–investment patterns observed during the years of the crisis.