12 - Are There Any Behavioral Insights for Macroeconomists?

Summary

This chapter begins by noting the key ingredients in Akerlof and Shiller’s bestseller Animal Spirits but goes on to cover a far wider range of macroeconomics issues, including a detailed coverage of Minsky’s “financial instability hypothesis” that prefigures their work. After examining alternative theories of how speculative markets work and discussing herding behavior via both information and decision rule cascades, the chapter considers Keynesian view of animal spirits in relation to liquidity preference, leading to a discussion of Katana’s work on the impact of consumer confidence on discretionary spending. Next comes analysis of saving behavior in relation to innovative mortgage products and the impact of evolving bank lending rules on housing affordability. After considering Minsky’s work, material from earlier chapters is used to provide new perspectives on involuntary unemployment, inflation, exchange rate determination and the importance of non-price factors in the determination of international trade (with a discussion of the limited ways in which exchange rates shape trade). Finally, behavioral analysis of decision-making is applied to the making of macroeconomic policy.