Animal Spirits in a Monetary Model
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.
We would like to thank Gauti Eggertsson for his discussion of our work at the Conference in Honor of Michael Woodford's Contributions to Economics, held at the Federal Reserve Bank of New York on May 19th and 20th of 2016. We also thank the participants at the conference and participants at the UCLA macro and international finance workshops. We have both benefited from conversations with Giovanni Nicolò. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Roger E.A. Farmer & Konstantin Platonov, 2019. "Animal Spirits in a Monetary Model," European Economic Review, . citation courtesy of