The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Animal Spirits

  • Roger E. A. Farmer
Reference work entry


The term ‘animal spirits’ was used by Keynes to refer to the idea that business cycles might be caused by crowd psychology. Recent work, in the aftermath of rational expectations, has focused on incorporating this idea into general equilibrium theory by exploiting the fact that dynamic general equilibrium models often contain a continuum of indeterminate equilibria. In stochastic models, production may differ across states of nature solely because of differences in the rational self-fulfilling beliefs of investors. This dependence of outcomes on beliefs provides a modern interpretation of the idea that the business cycle may be driven by animal spirits.


Animal spirits Autarky Capital–labour substitution Commodity space Comparative statics Complete and incomplete participation Determinacy and indeterminacy of equilibria Dynamic inefficiency Dynamic stochastic general equilibrium (DSGE) models Externalities in preferences Extrinsic uncertainty General equilibrium Golden rule Great Depression Hume, D. Infinite horizon models Insurance contracts Intrinsic uncertainty Keynes, J. M. Kydland, F. Leisure Lucas, R. Markov processes Overlapping generations models Prescott, E. Rational expectations Real business cycles Returns to scale Self-fulfilling expectations Stabilization policy Sunspot equilibrium Technology shocks Thornton, H. Total factor productivity Variable capacity utilization 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Roger E. A. Farmer
    • 1
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