Animal Spirits, Persistent Unemployment and the Belief Function
39 Pages Posted: 29 Nov 2010
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Animal Spirits, Persistent Unemployment and the Belief Function
Date Written: November 2010
Abstract
This paper presents a theory of the monetary transmission mechanism in an old-Keynesian model with 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 the new and old-Keynesian models using U.S. data and I show that the old-Keynesian model fits the data better than its new-Keynesian competitor.
Keywords: animal spirits, inflation, unemployment
JEL Classification: E24, E31, E32
Suggested Citation: Suggested Citation
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