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Wednesday, August 03, 2011

"Animal Spirits, Rational Bubbles and Unemployment in an Old-Keynesian Model"

Roger Farmer:

Animal Spirits, Rational Bubbles and Unemployment in an Old-Keynesian Model, by Roger Farmer, NBER Working Paper No. 17137, June 2011 [open link?]: Abstract This paper presents a model of the macroeconomy in which any unemployment rate may be a steady-state equilibrium and every equilibrium unemployment rate is associated with a different value for the price of assets. To select an equilibrium, I construct a theory in which asset price bubbles are caused by the self-fulfilling animal spirits of market participants, selected by a belief function. In contrast to my earlier work on this topic, asset prices may be unbounded. All of the actors in my model have rational expectations and the asset price bubbles that occur are individually rational, even though the equilibria of the model are socially inefficient. My work opens the door for a new class of theories in which market psychology, captured by the belief function, plays an independent role in helping us to understand economic crises.

    Posted by on Wednesday, August 3, 2011 at 12:24 AM in Academic Papers, Economics, Financial System | Permalink  Comments (0)


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