Business confidence and macroeconomic dynamics in a nonlinear two-country framework with aggregate opinion dynamics

Abstract

The main objective of the present paper is to investigate the role of the state of confidence in the macroeconomic dynamics of two interacting economies using the opinion dynamics approach by Weidlich and Haag (Concepts and models of a quantitative sociology. The dynamics of interacting populations. Springer, Berlin, 1983) and Lux (Econ J 105:881-889, 1995). Particularly, we assume that the overall state of confidence in the world (two-country) economy plays a role not only in the dynamics of the nominal exchange rate, but also in the dynamics of the real economy through the determination of aggregate investment, as already assumed by Taylor and O’Connell (Quart J Econ 100:871-886, 1985) and Franke and Semmler (Financial dynamics and business cycles: new perspectives. M.E. Sharpe, New York, pp 38-64, 1989). This novel feature allows us to consider far richer international macroeconomic interactions than most standard models. Further, it features wage-price dynamics that interact with output and employment fluctuations-leading to a Goodwin (Socialism, capitalism and economic growth. Cambridge University Press, Cambridge, pp 54-58, 1967)-type of distributive cycle-, as well as debt dynamics due to a credit-financed investment behavior. The resulting framework is both advanced as well as flexible enough to generate various types of persistent fluctuations, and also complex dynamics.