The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy
AbstractThis paper provides a self-contained review of the introduction of the animal spirits hypothesis into the infinite horizon optimal growth model. The analysis begins with an economic discussion of Pontryagin’s maximum principles. Thereafter, I develop a version of the increasing-returns Benhabib-Farmer model by showing the possible sub-optimality of the central planner solution and deriving the bifurcation condition for indeterminacy. Moreover, I give some insights on how to model intrinsic and extrinsic uncertainty. Finally, analysing the equilibrium condition of the labour market, I provide an intuitive rationale for the mechanism that in this model might lead prophecies to be self-fulfilling.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 30673.
Date of creation: 01 May 2011
Date of revision:
Maximum problems in continuous time; indeterminate equilibrium paths; self-fulfilling prophecies.;
Other versions of this item:
- Guerrazzi, Marco, 2012. "The animal spirits hypothesis and the Benhabib–Farmer condition for indeterminacy," Economic Modelling, Elsevier, vol. 29(4), pages 1489-1497.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C0 - Mathematical and Quantitative Methods - - General
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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