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Confidence, Crashes and Animal Spirits

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Roger E.A. Farmer

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Abstract

This paper argues that the equilibrium business cycle theory which has guided macroeconomics for the past thirty years is flawed. I introduce an alternative paradigm that retains the main message of Keynes' General Theory and which reconciles that message with Walrasian economics. I argue that there are two market failures in the labor market: A lemons problem and an externality. I show how those two problems lead to inefficient equilibria in which the unemployment rate is determined by the self-fulfilling beliefs of stock market participants.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14846.

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Date of creation: Apr 2009
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Handle: RePEc:nbr:nberwo:14846

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E0 - Macroeconomics and Monetary Economics - - General
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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  1. Pissarides, Christopher A, 1976. "Job Search and Participation," Economica, London School of Economics and Political Science, vol. 43(169), pages 33-49, February. [Downloadable!] (restricted)
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This page was last updated on 2009-11-25.

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