Animal Spirits in a Monetary Model

23 Pages Posted: 18 Apr 2016

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)

Konstantin Platonov

University of California, Los Angeles (UCLA)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2016

Abstract

We integrate Keynesian economics with general equilibrium theory in a new way. Our approach differs from the prevailing New Keynesian paradigm in two ways. First, our model displays steady state indeterminacy. This feature allows us to explain persistent unemployment which we model as movements among the steady state equilibria of our model. Second, our model displays dynamic indeterminacy. This feature allows us to explain the real effects of nominal shocks by selecting a dynamic equilibrium where prices are slow to respond to unanticipated money supply disturbances. Price rigidity arises as part of a rational expectations equilibrium in which the equilibrium is selected by beliefs. To close our model, we introduce a new fundamental that we refer to as the belief function.

Keywords: animal spirits, belief function, Keynesian economics, Unemployment

JEL Classification: E12, E3, E4

Suggested Citation

Farmer, Roger E.A. and Platonov, Konstantin, Animal Spirits in a Monetary Model (March 2016). CEPR Discussion Paper No. DP11197, Available at SSRN: https://ssrn.com/abstract=2766505

Roger E.A. Farmer (Contact Author)

University of Warwick ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://Rogerfarmer.com

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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National Institute of Economic and Social Research (NIESR) ( email )

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United Kingdom

HOME PAGE: http://NIESR.ac.uk

Konstantin Platonov

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

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