REAL BUSINESS CYCLES AND THE ANIMAL SPIRITS HYPOTHESIS

We calibrate a quantitative equilibrium macroeconomic model with an aggregate technology that is subject to increasing returns and show that this model may display fluctuations at business cycle frequencies even when there are no shocks to the fundamentals of the economy. These fluctuations are due to the self-fulfilling beliefs of investors which we call ''animal spirits.'' We compare the impulse response functions predicted by our model and by two other more standard models with a four-variable vector autoregression on U.S. data. Our animal spirits economy is the most successful of the three at matching broad features of the dynamic responses in the data. Journal of Economic Literature Classification Numbers: E00, E3, E32. (C) 1994 Academic Press, Inc.