Abstract

http://ssrn.com/abstract=2099350
 
 

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Animal Spirits, Heterogeneous Expectations and the Amplification and Duration of Crises


Tiziana Assenza


Catholic University of Milan; University of Amsterdam - CeNDEF

C. H. Hommes


University of Amsterdam; CeNDEF; Tinbergen Institute

William A. Brock


University of Wisconsin, Madison - Department of Economics ; University of Missouri at Columbia - Department of Economics

June 30, 2012


Abstract:     
We introduce a simple equilibrium model of a market for loans. Households lend to firms and form expectations about their loan default probability. Under heterogeneous expectations, with switching between forecasting strategies driven by reinforcement learning, even a small fraction of pessimistic traders has a large aggregate effect, causing a heterogeneous expectations risk premium, i.e. significantly higher contract rates for loans and significantly lower output. Our stylized model illustrates how animal spirits and heterogeneous expectations may lead to a confidence loss and to financial instability amplifying the magnitude of economic crises and slowing down recovery.

Number of Pages in PDF File: 39

Keywords: Heterogeneous Expectations, Crises, Animal Spirits

JEL Classification: E32, D83, D84

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Date posted: July 4, 2012 ; Last revised: July 5, 2012

Suggested Citation

Assenza, Tiziana and Hommes, C. H. and Brock, William A., Animal Spirits, Heterogeneous Expectations and the Amplification and Duration of Crises (June 30, 2012). Available at SSRN: http://ssrn.com/abstract=2099350 or http://dx.doi.org/10.2139/ssrn.2099350

Contact Information

Tiziana Assenza (Contact Author)
Catholic University of Milan ( email )
University of Amsterdam - CeNDEF ( email )
Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands
C. H. Hommes
University of Amsterdam ( email )
Roetersstraat 11
Amsterdam, 1018WB
Netherlands
CeNDEF ( email )
Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands
HOME PAGE: http://www1.fee.uva.nl/cendef/
Tinbergen Institute ( email )
Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
William A. Brock
University of Wisconsin, Madison - Department of Economics ( email )
1180 Observatory Drive
Madison, WI 53706
United States
608-263-6655 (Phone)
608-263-3876 (Fax)
University of Missouri at Columbia - Department of Economics ( email )
118 Professional Building
Columbia, MO 65211
United States
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