Discussion Paper Details

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Title: The Evolution of Endogenous Business Cycles

Author(s): Roger E A Farmer

Publication Date: August 2012

Keyword(s): indeterminacy, self-fulfilling propcheices, sunspots and unemployment

Programme Area(s): International Macroeconomics

Abstract: This paper distinguishes between two kinds of Endogenous Business Cycle models, and discusses the evolution from first generation EBC1 models to second generation EBC2 models. I argue that EBC1 models, which display dynamic indeterminacy, are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models, which display steady-state indeterminacy, are a more radical departure from the classical Real Business Cycle model; they represent a return to one of the most important ideas to emerge from Keynes? (1936) General Theory; that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.

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Bibliographic Reference

Farmer, R. 2012. 'The Evolution of Endogenous Business Cycles'. London, Centre for Economic Policy Research.