Booms and Busts: New Keynesian and Behavioral Explanations
CESifo, Munich, 2010
CESifo Working Paper No. 3293
Capitalism is characterized by booms and busts. Periods of strong growth in output alternate with periods of declines in economic growth. Every macro-economic theory should attempt to explain these endemic business cycle movements. In this paper I present two paradigms that attempt to explain these booms and busts. One is the DSGE-paradigm in which agents have unlimited cognitive abilities. The other paradigm is a behavioural one in which agents are assumed to have limited cognitive abilities. These two types of models produce a radically different macroeconomic dynamics. I analyze these differences. I also study the different policy implications of these two paradigms.
Fiscal Policy, Macroeconomics and Growth
Monetary Policy and International Finance