George Marios Angeletos*, Jennifer La'o

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

198 Scopus citations


This paper develops a new theory of fluctuations-one that helps accommodate the notions of "animal spirits" and "market sentiment" in unique-equilibrium, rational-expectations, macroeconomic models. To this goal, we limit the communication that is embedded in a neoclassical economy by allowing trading to be random and decentralized. We then show that the business cycle may be driven by a certain type of extrinsic shocks which we call sentiments. These shocks formalize shifts in expectations of economic activity without shifts in the underlying preferences and technologies; they are akin to sunspots, but operate in unique-equilibrium models. We further show how communication may help propagate these shocks in a way that resembles the spread of fads and rumors and that gives rise to boom-and-bust phenomena. We finally illustrate the quantitative potential of our insights within a variant of the RBC model.

Original languageEnglish (US)
Pages (from-to)739-779
Number of pages41
Issue number2
StatePublished - Mar 2013


  • Animal spirits
  • Business cycles
  • Confidence
  • Contagion
  • Decentralization
  • Higher-order beliefs
  • Incomplete information

ASJC Scopus subject areas

  • Economics and Econometrics


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