STATE OF CONFIDENCE AND ANTI-CYCLICAL ECONOMIC POLICY IN A KEYNESIAN MACROECONOMIC MODEL

Abstract

The state of confidence is a key element for understanding the decision-making
process of economic agents in Keynesian theory. Despite this, this variable is rarely found in
formal macroeconomic models. The difficulty in representing mathematically a subjective
variable and its dependence on the agent’s psychological conditions explain this absence.
In this paper we present a formal macroeconomic model that incorporates this element
and discusses its relationship with the fiscal policy implemented by the government. In
considering the impact of the state of confidence on the components of aggregate demand,
the model reveals the possibility of counterproductive results of an expansionary fiscal
policy, a result that differs from many traditional Keynesian models. The present paper
therefore presents a critique of the Keynesian approaches that necessarily propose the use
of expansionist policies in periods of economic slowdown.