Confidence Crashes and Animal Spirits

Roger Farmer

No 603, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper presents a model of the macroeconomy that reformulates what I take to be two important ideas from Keynes General Theory. The first is that there may be a continuum of steady state unemployment rates. The second is that beliefs select an equilibrium. I argue that search and matching costs in the labor market lead to the existence of a continuum of equilibria and I resolve the resulting indeterminacy by assuming that the beliefs of stock market participants are self-fulfilling. The paper reconciles Keynesian economics with general equilibrium theory without invoking the assumption of frictions that prevent wages and prices from reaching their equilibrium levels.

Date: 2011
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Related works:
Journal Article: Confidence, Crashes and Animal Spirits (2012)
Working Paper: Confidence, Crashes and Animal Spirits (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:603

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