Working Paper: NBER ID: w26557
Authors: Roger Farmer
Abstract: For the past thirty years of the history of macroeconomic thought, the Indeterminacy School of Macroeconomics has used general equilibrium models with indeterminate equilibria to understand the independent role of beliefs in shaping macroeconomic outcomes. In this paper I review the most recent advances in the indeterminacy agenda, Keynesian Search Theory, and I advance that agenda by introducing self-fulfilling beliefs to a Keynesian Search model in two different ways. One variant of the model is driven by an exogenous process for investment expenditure. If investment is exogenous, the only way to restore full employment is by replacing private investment with public investment. The second variant of the model is driven by consumer confidence. If consumer confidence is exogenous, treasury or central bank intervention in the asset markets is a more effective means of restoring full employment than fiscal policy. In either scenario, increased government consumption will not be effective at maintaining full employment in the face of permanently depressed beliefs about the value of private assets.
Keywords: beliefs; macroeconomic outcomes; Keynesian search theory
JEL Codes: D50; E12; E24; 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) | economic recovery (E65) |
| public investment (H54) | full employment (J68) |
| consumer confidence (D12) | demand for goods (D12) |
| demand for goods (D12) | employment (J68) |
| government consumption (E20) | full employment (J68) |
| depressed beliefs about private asset values (D14) | full employment (J68) |