Confidence, Crashes and Animal Spirits

31 Pages Posted: 7 Apr 2009 Last revised: 27 Jul 2022

See all articles by Roger E. A. Farmer

Roger E. A. Farmer

University of Warwick; University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); National Institute of Economic and Social Research (NIESR)

Date Written: April 2009

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.

Suggested Citation

Farmer, Roger E.A., Confidence, Crashes and Animal Spirits (April 2009). NBER Working Paper No. w14846, Available at SSRN: https://ssrn.com/abstract=1372950

Roger E.A. Farmer (Contact Author)

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