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Title: The Indeterminacy School in Macroeconomics

Author(s): Roger E A Farmer

Publication Date: May 2019

Keyword(s): Indeterminacy and Macroeconomics

Programme Area(s): Monetary Economics and Fluctuations

Abstract: The Indeterminacy School in Macroeconomics exploits the fact that macroeconomic models often display multiple equilibria to understand real-world phenomena. There are two distinct phases in the evolution of its history. The first phase began as a research agenda at the University of Pennsylvania in the U.S. and at CEPREMAP in Paris in the early 1980s. This phase used models of dynamic indeterminacy to explain how shocks to beliefs can temporarily influence economic outcomes. The second phase was developed at the University of California Los Angeles in the 2000s. This phase uses models of incomplete factor markets to explain how shocks to beliefs can permanently influence economic outcomes. The first phase of the Indeterminacy School has been used to explain volatility in financial markets. The second phase of the Indeterminacy School has been used to explain periods of high persistent unemployment. The two phases of the Indeterminacy School provide a microeconomic foundation to Keynes' General Theory that does not rely on the assumption that prices and wages are sticky.

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Bibliographic Reference

Farmer, R. 2019. 'The Indeterminacy School in Macroeconomics'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13745