The Importance of Beliefs in Shaping Macroeconomic Outcomes

Roger Farmer

No 26557, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: For the past thirty years of the history of macroeconomic thought, the Indeterminacy School of Macroeconomics has used general equilibrium models with indeterminate equilibria to understand the independent role of beliefs in shaping macroeconomic outcomes. In this paper I review the most recent advances in the indeterminacy agenda, Keynesian Search Theory, and I advance that agenda by introducing self-fulfilling beliefs to a Keynesian Search model in two different ways. One variant of the model is driven by an exogenous process for investment expenditure. If investment is exogenous, the only way to restore full employment is by replacing private investment with public investment. The second variant of the model is driven by consumer confidence. If consumer confidence is exogenous, treasury or central bank intervention in the asset markets is a more effective means of restoring full employment than fiscal policy. In either scenario, increased government consumption will not be effective at maintaining full employment in the face of permanently depressed beliefs about the value of private assets.

JEL-codes: D50 E12 E24 E32 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-dge, nep-hpe, nep-mac and nep-ore
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Roger E A Farmer, 2020. "The importance of beliefs in shaping macroeconomic outcomes," Oxford Review of Economic Policy, Oxford University Press, vol. 36(3), pages 675-711.

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Journal Article: The importance of beliefs in shaping macroeconomic outcomes (2020)
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