Working Paper: NBER ID: w16522
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; Persistent Unemployment; Belief Function; Monetary Transmission Mechanism
JEL Codes: E24; E3; E31; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Animal spirits (E32) | Persistent unemployment (J64) |
| Beliefs about future economic conditions (E66) | Self-fulfilling prophecies regarding unemployment rates (J64) |
| Belief functions (D83) | Expectations of nominal income growth (E31) |
| Beliefs (D83) | Changes in unemployment rates (J64) |
| Beliefs (D83) | Inflation (E31) |
| Beliefs (D83) | Output growth (O40) |