Working Paper: NBER ID: w25879
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: multiple equilibria; dynamic indeterminacy; steady-state indeterminacy; sunspots; animal spirits; beliefs; indeterminacy school; macroeconomics
JEL Codes: D5; E40
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) | permanent influence on economic outcomes (F69) |
| temporary influence on economic outcomes (F69) | fluctuations in economic activity (E32) |
| permanent influence on economic outcomes (F69) | high persistent unemployment (J64) |
| high persistent unemployment (J64) | substantial welfare losses (D69) |
| high persistent unemployment (J64) | deviations from social optimum unemployment rate (J64) |