A first formal approach to animal spirits beyond uncertainty

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Gerasimos T. Soldatos
Erotokritos Varelas

Abstract

Standard Macroeconomics treats animal spirits as a source of uncertainty disturbing otherwise rational expectations. But, Keynesian animal spirits ensue from suboptimal emotional responses to socioeconomic status change beyond matters of uncertainty. This paper identifies such spirits with the disturbance from the optimal decision-making implied by an emotional well-being utility function. The introduction of a policy-maker, holding its own view of private welfare in a society of emotional individuals, generates by itself, i.e. in the absence of animal spirits, uniform business fluctuations. This is the result of the income redistribution needed to reconcile the policy-maker’s with the emotional individual’s view of private welfare. Consequently, if animal-spirits induced fluctuations are already present when a policy-maker is introduced in the economy, the aim of policy intervention should be the design of that income redistribution that would not aggravate the business cycle but that would end up in uniform only cycles, with the aid perhaps of discretionary interest rate policy. Nevertheless, if animal spirits do not exist when the policy-maker enters the system, the income-redistribution induced cycles may incite such spirits by themselves in which case the cycles will not be of the uniform type. All comes down to “income and emotionâ€, to an ageless and ecumenical fact of life, complicated purposefully or not by authority.

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