Sunspots animal spirits and business cycles

Abstract

Due to difficulties associated with measuring expectations and observing random coordination devices, the models that posit the idea that business cycles being driven by expectations are hard to test empirically. The paper proposes an experiment to capture features of an expectation driven business cycles model and investigate whether such cycles arise in an experimental setting. Externalities, uncertainty and an extrinsic random variable to mimic the crucial features of the model are introduced. The results provide preliminary support for the hypothesis that given the right incentives for coordination, expectations-driven cycles do occur.