Animal Spirits, Persistent Unemployment and the Belief Function

Roger Farmer

No 16522, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents a theory of the monetary transmission mechanism in a monetary version of Farmer's (2009) model in which there are multiple equilibrium unemployment rates. The model has two equations in common with the new-Keynesian model; the optimizing IS curve and the policy rule. It differs from the new-Keynesian model by replacing the Phillips curve with a belief function to determine expectations of nominal income growth. I estimate both models using U.S. data and I show that the Farmer monetary model fits the data better than its new-Keynesian competitor.

JEL-codes: E24 E3 E31 E4 (search for similar items in EconPapers)
Date: 2010-11
Note: EFG ME
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Citations: View citations in EconPapers (17)

Published as “Animal Spirits, Persistent Unemployment and the Belief Function”, Chapter 7, in Rethinking Expectations: The Way Forward for Macroeconomics , Roman Frydman and Edmund Phelps eds, Princet on University Press, 2013

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Working Paper: Animal Spirits, Persistent Unemployment and the Belief Function (2010)
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