Working Paper: CEPR ID: DP9080
Authors: Roger E. A. Farmer
Abstract: This paper distinguishes between two kinds of Endogenous Business Cycle models, and discusses the evolution from first generation EBC1 models to second generation EBC2 models. I argue that EBC1 models, which display dynamic indeterminacy, are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models, which display steady-state indeterminacy, are a more radical departure from the classical Real Business Cycle model; they represent a return to one of the most important ideas to emerge from Keynes? (1936) General Theory; that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.
Keywords: indeterminacy; self-fulfilling prophecies; sunspots; unemployment
JEL Codes: B22; E20; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| self-fulfilling beliefs (D83) | business cycle (E32) |
| self-fulfilling beliefs (D83) | employment (J68) |
| self-fulfilling beliefs (D83) | GDP (E20) |
| high unemployment (J64) | persistence of high unemployment (J64) |
| beliefs (D83) | economic indicators (E01) |