By Paul de Grauwe and Yuemei Ji
Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations driven by animal spirits. Our discussion includes two applications. One is on the optimal level of inflation targeting under a zero lower bound constraint. The other is on the role of animal spirits in explaining the synchronization of business cycles across countries.
I guess this is more an issue of semantics, but animal spirits still need to be triggered by something, however small that may be, and this something is still exogenous to the model, right? The dream of having a fully endogenous model is a pipe dream.