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The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy

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  • Guerrazzi, Marco

Abstract

This 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 Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30673.

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Date of creation: 01 May 2011
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Handle: RePEc:pra:mprapa:30673

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Keywords: Maximum problems in continuous time; indeterminate equilibrium paths; self-fulfilling prophecies.;

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  1. Woodford, Michael, 1990. "Learning to Believe in Sunspots," Econometrica, Econometric Society, vol. 58(2), pages 277-307, March.
  2. K. Shell, 1968. "Applications of Pontryagin's Maximum Principle of Economics," Working papers 16, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Kehoe, Timothy J & Levine, David K & Romer, Paul M, 1992. "On Characterizing Equilibria of Economies with Externalities and Taxes as Solutions to Optimization Problems," Economic Theory, Springer, vol. 2(1), pages 43-68, January.
  4. Benhabib, Jess & Nishimura, Kazuo, 1998. "Indeterminacy and Sunspots with Constant Returns," Journal of Economic Theory, Elsevier, vol. 81(1), pages 58-96, July.
  5. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics.
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  8. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
  9. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct.
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  19. repec:fth:coluec:431 is not listed on IDEAS
  20. M Guerrazzi, 2008. "A Dynamic Efficiency-Wage Model with Continuous Effort and Externalities," Economic Issues Journal Articles, Economic Issues, vol. 13(2), pages 37-58, September.
  21. Farmer, Roger E.A. & Woodford, Michael, 1997. "Self-Fulfilling Prophecies And The Business Cycle," Macroeconomic Dynamics, Cambridge University Press, vol. 1(04), pages 740-769, December.
  22. Tomoyuki Nakajima, 2003. "Unemployment and Indeterminacy," Working Papers 2003-24, Brown University, Department of Economics.
  23. Dorfman, Robert, 1969. "An Economic Interpretation of Optimal Control Theory," American Economic Review, American Economic Association, vol. 59(5), pages 817-31, December.
  24. Marianne Baxter & Robert G. King, 1991. "Productive externalities and business cycles," Discussion Paper / Institute for Empirical Macroeconomics 53, Federal Reserve Bank of Minneapolis.
  25. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
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