Working Paper: CEPR ID: DP13745
Authors: Roger E. A Farmer
Abstract: The Indeterminacy School in Macroeconomics exploits the fact that macroeconomic models often display multiple equilibria to understand real-world phenomena. There are two distinct phases in the evolution of its history. The first phase began as a research agenda at the University of Pennsylvania in the U.S. and at CEPREMAP in Paris in the early 1980s. This phase used models of dynamic indeterminacy to explain how shocks to beliefs can temporarily influence economic outcomes. The second phase was developed at the University of California Los Angeles in the 2000s. This phase uses models of incomplete factor markets to explain how shocks to beliefs can permanently influence economic outcomes. The first phase of the Indeterminacy School has been used to explain volatility in financial markets. The second phase of the Indeterminacy School has been used to explain periods of high persistent unemployment. The two phases of the Indeterminacy School provide a microeconomic foundation to Keynes’ General Theory that does not rely on the assumption that prices and wages are sticky.
Keywords: indeterminacy; macroeconomics
JEL Codes: E3; D50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shocks to beliefs (D80) | temporary influence on economic outcomes (F69) |
| shocks to beliefs (D80) | volatility in financial markets (G17) |
| shocks to beliefs (D80) | permanent changes in economic outcomes (F69) |
| shocks to beliefs (D80) | high persistent unemployment (J64) |
| temporary fluctuations driven by beliefs (E32) | sustained effects (C41) |
| nature of the market (dynamic vs. steady-state) (D53) | persistence of unemployment (J64) |