DP8100 Animal Spirits, Persistent Unemployment and the Belief Function

Author(s):	Roger E A Farmer
Publication Date:	November 2010
Date Revised:	November 2011
Keyword(s):	animal spirits, inflation, unemployment
JEL(s):	E24, E31, E32
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=8100

This paper presents a theory of the monetary transmission mechanism in a monetary version of Farmer?s (2009) model in which there are multiple equilibrium unemployment rates. The model has two equations in common with the new-Keynesian model; the optimizing IS curve and the policy rule. It differs from the new-Keynesian model by replacing the Phillips curve with a belief function to determine expectations of nominal income growth. I estimate both models using U.S. data and I show that the Farmer monetary model fits the data better than its new-Keynesian competitor.