Bringing Sentiment into Economic Reason

This book introduces SAGEthe Sentiment-Augmented General Equilibrium frameworkas a unified theory of choice, finance, and growth that integrates human sentiment into the core of economic modeling. Departing from fragmented traditions across intertemporal choice theory, asset pricing, and growth models, SAGE develops a utility-based structure in which all assetsmoney, bonds, capitaldeliver utility contingent on liquidity, price volatility, and sentiment-driven expectations. Agents form rational yet sentiment-sensitive expectations. Central to the model is the dynamic interaction between reason and sentiment: expectations evolve not only from knowledge and information but also from psychological states, market moods, and narrative feedback loops. The reverse holds as well, since agents' expectations about the future shape their current sentiment. SAGE thus explains how sentiment and reason affect the utility agents derive from the full range of resources available to them and shifts in their portfolio choices reshape macroeconomic outcomes even in the absence of structural shocks. The model reproduces observed anomaliespersistent stagnation, excess volatility, asset mispricingas rational equilibria under uncertainty and belief asymmetry. By embedding financial frictions, market depth, and institutional trust into the utility calculus, SAGE also links macroeconomic dynamics to the quality of financial intermediation. The result is a flexible, tractable, and psychologically grounded framework that offers new directions for empirical research, policy analysis, and the scientific unification of economics.

"Bossone's book offers a welcome departure from New Keynesian orthodoxy by developing a unified framework where sentiment and reason jointly shape economic expectations and outcomes.
Prof. Roger Farmer, Emeritus Distinguished Professor of Economics at The University of California, Los Angeles

Integrates sentiment and reason into economic modeling to reflect real-world decision-making Unifies choice, finance, and growth theories in a single general equilibrium framework Explains stagnation, bubbles, volatility, capital flows, and labor dynamics as rational outcomes of endogenous sentiment

Autorentext

Biagio Bossone is a financial advisor to international organizations, and consultants to governments, central banks, and financial institutions across Africa, Asia, Europe, the Middle East, and the Pacific. He is currently a Visiting Scholar at the IMF and Scientific Advisor to the Fast Forward Foundation, which promotes the inclusive and sustainable transformation of welfare systems. He has served as Executive Director at the World Bank, member of the Executive Board of the IMF, Head of the Public Investment Evaluation Unit at Italy's Presidency of the Council of Ministers, General Accountant and Director General of Budget and Finance of the Sicilian Regional Government. A former banker and central banker, he has also participated in G10 and European central banking working groups and task forces, and served as an expert to the High-Level Commission on World Bank Reform. He has been Professor of International Finance at the University of Palermo and the University of Salento, Italy, and has led training programs on central banking in several countries. He has authored and co-authored numerous studies on economics, banking, finance, and macro-financial policy issues.

Klappentext

This book introduces SAGE—the Sentiment-Augmented General Equilibrium framework—as a unified theory of choice, finance, and growth that integrates human sentiment into the core of economic modeling. Departing from fragmented traditions across intertemporal choice theory, asset pricing, and growth models, SAGE develops a utility-based structure in which all assets—money, bonds, capital—deliver utility contingent on liquidity, price volatility, and sentiment-driven expectations. Agents form rational yet sentiment-sensitive expectations. Central to the model is the dynamic interaction between reason and sentiment: expectations evolve not only from knowledge and information but also from psychological states, market moods, and narrative feedback loops. The reverse holds as well, since agents’ expectations about the future shape their current sentiment. SAGE thus explains how sentiment and reason affect the utility agents derive from the full range of resources available to them and shifts in their portfolio choices reshape macroeconomic outcomes even in the absence of structural shocks. The model reproduces observed anomalies—persistent stagnation, excess volatility, asset mispricing—as rational equilibria under uncertainty and belief asymmetry. By embedding financial frictions, market depth, and institutional trust into the utility calculus, SAGE also links macroeconomic dynamics to the quality of financial intermediation. The result is a flexible, tractable, and psychologically grounded framework that offers new directions for empirical research, policy analysis, and the scientific unification of economics.

"Bossone's book offers a welcome departure from New Keynesian orthodoxy by developing a unified framework where sentiment and reason jointly shape economic expectations and outcomes.”
Prof. Roger Farmer, Emeritus Distinguished Professor of Economics at The University of California, Los Angeles

Inhalt

Introduction.- Review of the Literature.- The Theory.- Applications.- Future Extensions and Applications of SAGE.- Conclusion.