Animal Spirits, Persistent Unemployment and the Belief Function

39 Pages Posted: 29 Nov 2010

See all articles by Roger E. A. Farmer

Roger E. A. Farmer

University of Warwick; University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); National Institute of Economic and Social Research (NIESR)

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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

Farmer, Roger E.A., Animal Spirits, Persistent Unemployment and the Belief Function (November 2010). CEPR Discussion Paper No. DP8100, Available at SSRN: https://ssrn.com/abstract=1714872

Roger E.A. Farmer (Contact Author)

University of Warwick ( email )

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Centre for Economic Policy Research (CEPR)

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National Institute of Economic and Social Research (NIESR) ( email )

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