The animal spirits hypothesis and the Benhabib–Farmer condition for indeterminacy

Marco Guerrazzi

Economic Modelling, 2012, vol. 29, issue 4, 1489-1497

Abstract: This paper provides a self-contained review of the introduction of the animal spirits hypothesis into the infinite horizon optimal‐growth model. The analysis begins with an economic discussion of Pontryagin's maximum principles. Thereafter, I develop a version of the increasing-returns Benhabib–Farmer model by showing the possible sub-optimality of the central planner solution and deriving the bifurcation condition for indeterminacy. Moreover, I give some insights on how to model intrinsic and extrinsic uncertainty. Finally, analyzing the equilibrium condition of the labor market, I provide an intuitive rationale for the mechanism that in this model might lead prophecies to be self-fulfilling.

Keywords: Maximum problems in continuous time; Indeterminate equilibrium paths; Self-fulfilling prophecies (search for similar items in EconPapers)
JEL-codes: C1 E21 E32 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:4:p:1489-1497

DOI: 10.1016/j.econmod.2012.04.024

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