NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Animal Spirits, Persistent Unemployment and the Belief Function

Roger E.A. Farmer

NBER Working Paper No. 16522
Issued in November 2010, Revised in May 2012
NBER Program(s):   EFG   ME

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.

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Document Object Identifier (DOI): 10.3386/w16522

Published: “Animal Spirits, Persistent Unemployment and the Belief Function”, Chapter 7, in Rethinking Expectations: The Way Forward for Macroeconomics , Roman Frydman and Edmund Phelps eds, Princet on University Press, 2013

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