Animal Spirits, Financial Markets and Aggregate Instability

Mark Weder | The University of Adelaide

People’s animal spirits are prime drivers of U.S. business cycle fluctuations. This insight is demonstrated within an estimated artificial economy with financial market frictions. Animal spirits shocks account for around 40 percent of output fluctuations over the period from 1955 to 2014. Financial friction and technology shocks are considerably less important with point estimates for both near 20 percent. We also find that the Great Recession, for the most part, was caused by adverse shocks to expectations.