Working Paper: NBER ID: w14846
Authors: Roger E.A. Farmer
Abstract: This paper presents a model of the macroeconomy that reformulates what I take to be two important ideas from Keynes General Theory. The first is that there may be a continuum of steady state unemployment rates. The second is that beliefs select an equilibrium. I argue that search and matching costs in the labor market lead to the existence of a continuum of equilibria and I resolve the resulting indeterminacy by assuming that the beliefs of stock market participants are self-fulfilling. The paper reconciles Keynesian economics with general equilibrium theory without invoking the assumption of frictions that prevent wages and prices from reaching their equilibrium levels.
Keywords: Keynesian Economics; Labor Markets; Animal Spirits
JEL Codes: E0; E12; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Beliefs of stock market participants (G41) | Economic activity (E29) |
| Beliefs about asset values (G19) | Employment levels (J23) |
| Search and matching costs (C78) | Continuum of equilibria in the labor market (J29) |
| Beliefs about future asset values (G19) | Demand (R22) |
| Demand (R22) | Employment levels (J23) |
| Beliefs (D83) | Unemployment rate (J64) |
| Beliefs create multiple equilibria (D59) | Labor markets (J49) |