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Confidence Crashes and Animal Spirits

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Listed author(s):
  • Roger E. A. Farmer

    (UCLA)

Abstract

This paper presents a model of the macroeconomy that reformulates what I take to be two important ideas from Keynes General Theory. The first is that there may be a continuum of steady state unemployment rates. The second is that beliefs select an equilibrium. I argue that search and matching costs in the labor market lead to the existence of a continuum of equilibria and I resolve the resulting indeterminacy by assuming that the beliefs of stock market participants are self-fulfilling. The paper reconciles Keynesian economics with general equilibrium theory without invoking the assumption of frictions that prevent wages and prices from reaching their equilibrium levels.

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File URL: https://economicdynamics.org/meetpapers/2011/paper_603.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 603.

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Date of creation: 2011
Handle: RePEc:red:sed011:603
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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Find related papers by JEL classification:
  • E0 - Macroeconomics and Monetary Economics - - General
  • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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  1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
  2. Paolo Gelain & Marco Guerrazzi, 2010. "A DSGE Model from the Old Keynesian Economics: An Empirical Investigation," CDMA Working Paper Series 201014, Centre for Dynamic Macroeconomic Analysis.
  3. Jordi Galí & Frank Smets & Rafael Wouters, 2012. "Unemployment in an Estimated New Keynesian Model," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 329-360.
  4. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
  5. Greenwald, Bruce & Stiglitz, Joseph E, 1988. "Pareto Inefficiency of Market Economies: Search and Efficiency Wage Models," American Economic Review, American Economic Association, vol. 78(2), pages 351-355, May.
  6. Farmer, Roger E.A., 2010. "How to reduce unemployment: A new policy proposal," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 557-572, July.
  7. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
  8. Alvin H. Hansen, 1936. "Mr. Keynes on Underemployment Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 44, pages 667-667.
  9. Farmer, Roger E. A. & Plotnikov, Dmitry, 2012. "Does Fiscal Policy Matter? Blinder And Solow Revisited," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 149-166, April.
  10. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  11. Farmer, Roger E A, 2010. "Animal Spirits, Persistent Unemployment and the Belief Function," CEPR Discussion Papers 8100, C.E.P.R. Discussion Papers.
  12. Roger E. A. Farmer, 2008. "Aggregate demand and supply," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(1), pages 77-93.
  13. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 225-251.
  14. Farmer, Roger, 2010. "Expectations, Employment and Prices," OUP Catalogue, Oxford University Press, number 9780195397901.
  15. Pissarides, Christopher A, 1984. "Search Intensity, Job Advertising, and Efficiency," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 128-143, January.
  16. Marco Guerrazzi, 2010. "Stochastic Dynamics and Matching in the Old Keynesian Economics: A Rationale for the Shimer's Puzzle," Discussion Papers 2010/95, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  17. Farmer, Roger E A, 2005. "Shooting the Auctioneer," CEPR Discussion Papers 4825, C.E.P.R. Discussion Papers.
  18. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
  19. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series 853, European Central Bank.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Vulgarni Keynezianizam (4. dio)
    by cronomy in Cronomy on 2012-11-16 07:42:45
  2. Krugman to Farmer: "Show Me Your Trailer, or I Won't Watch Your Movie"
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-08-18 21:51:00
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