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Animal Spirits, Persistent Unemployment and the Belief Function

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  • Roger E.A. Farmer

Abstract

This paper presents a theory of the monetary transmission mechanism in a monetary version of Farmer’s (2009) model in which there are multiple equilibrium unemployment rates. The model has two equations in common with the new-Keynesian model; the optimizing IS curve and the policy rule. It differs from the new-Keynesian model by replacing the Phillips curve with a belief function to determine expectations of nominal income growth. I estimate both models using U.S. data and I show that the Farmer monetary model fits the data better than its new-Keynesian competitor.

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File URL: http://www.nber.org/papers/w16522.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16522.

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Date of creation: Nov 2010
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Publication status: published as “Animal Spirits, Persistent Unemployment and the Belief Function”, Chapter 7, in Rethinking Expectations: The Way Forward for Macroeconomics , Roman Frydman and Edmund Phelps eds, Princet on University Press, 2013
Handle: RePEc:nbr:nberwo:16522

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  1. Peter J. Klenow & Benjamin A. Malin, 2010. "Microeconomic Evidence on Price-Setting," NBER Working Papers 15826, National Bureau of Economic Research, Inc.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  3. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November.
  4. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, December.
  5. Beyer, Andreas & Farmer, Roger E. A., 2003. "Identifying the monetary transmission mechanism using structural breaks," Working Paper Series 0275, European Central Bank.
  6. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, May.
  7. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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Cited by:
  1. Jianjun Miao & PENGFEI WANG & Lifang Xu, 2012. "Stock Market Bubbles and Unemployment," Boston University - Department of Economics - Working Papers Series WP2012-011, Boston University - Department of Economics.
  2. Farmer, Roger E A, 2011. "Animal Spirits, Financial Crises and Persistent Unemployment," CEPR Discussion Papers 8439, C.E.P.R. Discussion Papers.
  3. Farmer, Roger E.A., 2012. "The stock market crash of 2008 caused the Great Recession: Theory and evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 693-707.
  4. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, 03.
  5. Marco Guerrazzi, 2011. "Search And Stochastic Dynamics In The Old Keynesian Economics: A Rationale For The Shimer Puzzle," Metroeconomica, Wiley Blackwell, vol. 62(4), pages 561-586, November.
  6. Florin Bilbiie & Roland Straub, 2006. "Asset Market Participation, Monetary Policy Rules, and the Great Inflation," IMF Working Papers 06/200, International Monetary Fund.
  7. Emmanuel Saez & Pascal Michaillat, 2013. "A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters," 2013 Meeting Papers 1216, Society for Economic Dynamics.
  8. Roger Farmer, 2012. "The Stock Market Crash of 2008 Caused the Great Recession," 2012 Meeting Papers 145, Society for Economic Dynamics.
  9. Roger Farmer & Dmitry Plotnikov, 2012. "Does Fiscal Policy Matter? Blinder and Solow Revisited," 2012 Meeting Papers 73, Society for Economic Dynamics.
  10. Marco Guerrazzi, 2011. "Expectations, Employment and Prices: A Suggested Interpretation of the New ‘Farmerian’ Economics," Discussion Papers 2011/116, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  11. Airaudo, Marco & Nisticò, Salvatore & Zanna, Luis-Felipe, 2012. "Learning, Monetary Policy and Asset Prices," School of Economics Working Paper Series 2012-12, LeBow College of Business, Drexel University.

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