The Evolution of Endogenous Business Cycles

35 Pages Posted: 28 Sep 2012

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)

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Date Written: August 2012

Abstract

This paper distinguishes between two kinds of Endogenous Business Cycle models, and discusses the evolution from first generation EBC1 models to second generation EBC2 models. I argue that EBC1 models, which display dynamic indeterminacy, are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models, which display steady-state indeterminacy, are a more radical departure from the classical Real Business Cycle model; they represent a return 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.

Keywords: indeterminacy, self-fulfilling propcheices, sunspots, unemployment

JEL Classification: B22, E20, E32

Suggested Citation

Farmer, Roger E.A., The Evolution of Endogenous Business Cycles (August 2012). CEPR Discussion Paper No. DP9080, Available at SSRN: https://ssrn.com/abstract=2153530

Roger E.A. Farmer (Contact Author)

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