A First Formal Approach to Animal Spirits Beyond Uncertainty

European Journal of Government and Economics, 2015, 4(2), 104-117

14 Pages Posted: 2 Jan 2016

See all articles by Gerasimos Soldatos

Gerasimos Soldatos

Erotokritos Varelas

University of Macedonia - Department of Economics

Date Written: January 1, 2016

Abstract

Standard Macroeconomics treats animal spirits as a source of uncertainty disturbing rational otherwise expectations. But, Keynesian animal spirits ensue from suboptimal emotional response to socioeconomic status change beyond matters of uncertainty. This paper identifies such spirits with the disturbance from the optimal decisionmaking implied by an emotional well-being utility function. The introduction of a policymaker, 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 policymaker’s with the emotional individual’s view of private welfare. Consequently, if animal-spirits induced fluctuations are already present when a policymaker 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 policymaker 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 emotion”, to an ageless and ecumenical fact of life, complicated purposefully or not by authority.

Keywords: Animal spirits, Emotions, Socioeconomic status, Individual vs. social perception of private welfare, Business cycles

JEL Classification: D63, E32, E43, H11, Z13

Suggested Citation

Soldatos, Gerasimos and Varelas, Erotokritos, A First Formal Approach to Animal Spirits Beyond Uncertainty (January 1, 2016). European Journal of Government and Economics, 2015, 4(2), 104-117, Available at SSRN: https://ssrn.com/abstract=2709961

Erotokritos Varelas

University of Macedonia - Department of Economics ( email )

Thessaloniki, 54006
Greece

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