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

  • Guerrazzi, Marco

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, analyzing the equilibrium condition of the labor market, I provide an intuitive rationale for the mechanism that in this model might lead prophecies to be self-fulfilling.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 4 ()
Pages: 1489-1497

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:4:p:1489-1497
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