NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Animal Spirits in a Monetary Model

Roger E.A. Farmer, Konstantin Platonov

NBER Working Paper No. 22136
Issued in March 2016
NBER Program(s):   EFG   ME

We propose a fresh way of thinking about the monetary transmission mechanism. By integrating Keynesian economics with general equilibrium theory in a new way, we provide an alternative model and an alternative narrative to New-Keynesian economics to explain how macroeconomic policy influences prices and employment. We develop a simple graphical apparatus, the IS-LM-NAC framework, that can be used by policy makers to understand how policy affects the economy. A new element, the NAC curve, connects the interest rate to current and expected future values of the stock market and it explains how ‘animal spirits’ influence economic activity. Our framework provides a rich new approach to policy analysis that explains the short-run and long-run effects of policy, without the assumption that prices are prevented from moving by artificial barriers to price adjustment.

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This paper was revised on February 14, 2017

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22136

 
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