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The Evolution of Endogenous Business Cycles

  • Roger E.A. Farmer

This paper distinguishes two kinds of Endogenous Business Cycle models; EBC1 models, which display dynamic indeterminacy, and EBC2 models, which display steady-state indeterminacy. Both strands of the literature have their origins in the sunspot literature that developed at the University of Pennsylvania in the 1980s. I argue that EBC1 models are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models provide a microfoundation to one of the most important ideas to emerge from Keynes' (1936) General Theory; that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18284.

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Date of creation: Aug 2012
Publication status: published as Farmer, Roger E.A., 2016. "The Evolution Of Endogenous Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 20(02), pages 544-557, March.
Handle: RePEc:nbr:nberwo:18284
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  15. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
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  18. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, 08.
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  31. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
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  35. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
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