Discussion Paper Details

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Title: Animal Spirits in a Monetary Model

Author(s): Roger E A Farmer and Konstantin Platonov

Publication Date: March 2016

Keyword(s): animal spirits, belief function, Keynesian economics and Unemployment

Programme Area(s): International Macroeconomics and Finance, Labour Economics and Monetary Economics and Fluctuations

Abstract: We integrate Keynesian economics with general equilibrium theory in a new way. Our approach differs from the prevailing New Keynesian paradigm in two ways. First, our model displays steady state indeterminacy. This feature allows us to explain persistent unemployment which we model as movements among the steady state equilibria of our model. Second, our model displays dynamic indeterminacy. This feature allows us to explain the real effects of nominal shocks by selecting a dynamic equilibrium where prices are slow to respond to unanticipated money supply disturbances. Price rigidity arises as part of a rational expectations equilibrium in which the equilibrium is selected by beliefs. To close our model, we introduce a new fundamental that we refer to as the belief function.

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Bibliographic Reference

Farmer, R and Platonov, K. 2016. 'Animal Spirits in a Monetary Model'. London, Centre for Economic Policy Research.