Working Paper: CEPR ID: DP8100
Authors: Roger E. A. Farmer
Abstract: 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.
Keywords: animal spirits; inflation; unemployment
JEL Codes: E24; E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Animal spirits (E32) | Expectations of nominal income growth (E31) |
| Expectations of nominal income growth (E31) | Unemployment rate (J64) |
| Monetary policy (E52) | Unemployment rate (J64) |
| Old-Keynesian model (E12) | Unemployment rate (J64) |
| Belief function (D83) | Long-run steady state unemployment rate (J64) |
| Old-Keynesian model (E12) | Variations in output and inflation (E31) |