Abstract
The term ‘animal spirits’ was used by Keynes to refer to the idea that business cycles might be caused by crowd psychology. Recent work, in the aftermath of rational expectations, has focused on incorporating this idea into general equilibrium theory by exploiting the fact that dynamic general equilibrium models often contain a continuum of indeterminate equilibria. In stochastic models, production may differ across states of nature solely because of differences in the rational self-fulfilling beliefs of investors. This dependence of outcomes on beliefs provides a modern interpretation of the idea that the business cycle may be driven by animal spirits.
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