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Animal Spirits in a Monetary Model

Roger Farmer () and Konstantin Platonov ()

No 22136, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a fresh way of thinking about the monetary transmission mechanism. By integrating Keynesian economics with general equilibrium theory in a new way, we provide an alternative model and an alternative narrative to New-Keynesian economics to explain how macroeconomic policy influences prices and employment. We develop a simple graphical apparatus, the IS-LM-NAC framework, that can be used by policy makers to understand how policy affects the economy. A new element, the NAC curve, connects the interest rate to current and expected future values of the stock market and it explains how ‘animal spirits’ influence economic activity. Our framework provides a rich new approach to policy analysis that explains the short-run and long-run effects of policy, without the assumption that prices are prevented from moving by artificial barriers to price adjustment.

JEL-codes: E12 E3 E4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-hpe, nep-pr~, nep-mac and nep-mon
Date: 2016-03
Note: EFG ME
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Published as Roger E.A. Farmer & Konstantin Platonov, 2019. "Animal Spirits in a Monetary Model," European Economic Review, .

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