Guerrazzi, Marco (2011): The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy.
Download (256kB) | Preview
This paper provides a self-contained review of the introduction of the animal spirits hypothesis into the infinite horizon optimal growth model. The analysis begins with an economic discussion of Pontryagin’s maximum principles. Thereafter, I develop a version of the increasing-returns Benhabib-Farmer model by showing the possible sub-optimality of the central planner solution and deriving the bifurcation condition for indeterminacy. Moreover, I give some insights on how to model intrinsic and extrinsic uncertainty. Finally, analysing the equilibrium condition of the labour market, I provide an intuitive rationale for the mechanism that in this model might lead prophecies to be self-fulfilling.
|Item Type:||MPRA Paper|
|Original Title:||The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy|
|Keywords:||Maximum problems in continuous time; indeterminate equilibrium paths; self-fulfilling prophecies.|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles
C - Mathematical and Quantitative Methods > C0 - General
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth
|Depositing User:||Dr Marco Guerrazzi|
|Date Deposited:||04. May 2011 12:16|
|Last Modified:||16. Feb 2013 00:43|
Aiyagari, S.R. (1995) Comments on Farmer and Guo’s The Econometrics of Indeterminacy: an Applied Study. Federal Reserve Bank of Minneapolis, Research Department Staff Report No. 196.
Azariadis, C. (1981) Self-Fulfilling Prophecies. Journal of Economic Theory 25: 380-396.
Barro, R.J. and Sala-i-Martin, X. (2004) Economic Growth. 2nd Edition, Cambridge MA: MIT Press.
Basu, S. and Fernald, J.G. (1997) Returns to Scale in U.S. Production: Estimates and Implications. Journal of Political Economy 105: 248-283.
Baxter, M. and King, R.G. (1991) Productive Externalities and Business Cycles. Federal Reserve Bank of Minneapolis, Discussion Paper No. 53.
Benhabib, J. and Nishimura, K. (1998) Indeterminacy and Sunspots with Constant Returns’. Journal of Economic Theory 81: 58-96.
Benhabib, J. and Farmer, R.E.A. (1994) Indeterminacy and Increasing Returns. Journal of Economic Theory 63: 19-41.
Boldrin, M. and Rustichini, A. (1994) Growth and Indeterminacy in Dynamic Models with Externalities. Econometrica 62: 323-342.
Branch, W.A. and Evans, G.W. (2006) A Simple Recursive Forecasting Model. Economic Letters 91: 158-166.
Burda, M. and Weder, M.C. (2002) Complementarity of Labor Market Institutions, Equilibrium Unemployment and the Propagation of Business Cycles. German Economic Review 3: 1-24.
Caballero, R.J. and Lyons, R.K. (1989) The Role of External Economies in US Manufacturing. NBER Working Paper Series, Working Paper No. 3033.
Dixit, A.K. and Stiglitz, J.E. (1977) Monopolistic Competition and Optimum Product Diversity. American Economic Review 67: 297-308.
Dorfman, R. (1969) An Economic Interpretation of Optimal Control Theory. American Economic Review 59: 817-831.
Farmer, R.E.A. and Guo, J-T. (1994) Real Business Cycles and the Animal Spirits Hypothesis. Journal of Economic Theory 63: 42-72.
Farmer, R.E.A. and Guo, J-T. (1995) The Econometrics of Indeterminacy: An Applied Study. Carnegie-Rochester Conference Series on Public Policy 43: 225-271.
Farmer, R.E.A. and Woodford, M. (1997) Self-Fulfilling Prophecies and the Business Cycle. Macroeconomic Dynamics 1: 740-769.
Gandolfo, G. (1997), Economic Dynamics, Berlin: Springer-Verlag.
Giammarioli, N. (2003) Indeterminacy and Search Theory. European Central Bank Working Paper Series, Working Paper No. 271.
Guerrazzi, M. (2008) A Dynamic Efficiency-Wage Model with Continuous Effort and Externalities. Economic Issues 13: 37-58.
Hall, R.E. (1991) Labor Demand, Labor Supply, and Employment Volatility in Blanchard, O.J. and Fischer, S. (eds.), NBER Macroeconomics Annual, Cambridge MA: MIT Press.
Kamihigashi, T. (1996) Real Business Cycles and Sunspot Fluctuations are Observationally Equivalent. Journal of Monetary Economics 37: 105-117.
Kehoe, T.J., Levine, D.K. and Romer, P.M. (1992) On Characterizing Equilibria of Economies with Externalities and Taxes as Solutions to Optimization Problems. Economic Theory 2: 43-68.
Keynes, J.M. (1936) The General Theory of Employment, Interest and Money. London: MacMillan.
Knight, F.H. (1921) Risk, Uncertainty, and Profit. Boston MA: Houghton Mifflin Company.
Koopmans, T.C. (1965) On the Concept of Optimal Economic Growth. Cowles Foundation, Discussion Paper No. 238.
Kydland, F.E. and Prescott, E.C. (1982) Time to Build and Aggregate Fluctuations. Econometrica. 50: 1345-1370.
Mas-Colell, A., Whinston, M.D. and Green, J.R. (1995) Microeconomic Theory, New York: Oxford University Press. Muth, J.F. (1961) Rational Expectations and the Theory of Price Movements. Econometrica 29: 315-335.
Nakajima, T. (2005) Unemployment and Indeterminacy. Journal of Economic Theory 126: 314-327.
Pissarides, C.A. (2000) Equilibrium Unemployment Theory. 2nd Edition, Cambridge MA: MIT Press.
Pontryagin, L.S, Boltyanskii, V.G., Gamkrelidze, R.V. and Mishchenko, E.F. (1962) The Mathematical Theory of Optimal Processes. New York: Wiley & Sons.
Samuelson, P.A. (1958) An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money. Journal of Political Economy 66: 467-482.
Shell, K. (1969) Applications of Pontryagin’s Maximum Principle to Economics. in Beckmann, M.J. and Kunzi, H.P. (eds.) Lecture Notes in Operations Research and Mathematical Economics. Berlin: Springer-Verlag.
Shell, K. (1971) Notes on the Economics of Infinity. Journal of Political Economy 79: 1002-1011.
Shiller, R.J. (2005) Irrational Exuberance. New Jersey: Princeton University Press.
Solow, R.M. (1957) Technical Change and the Aggregate Production Function. Review of Economics and Statistics 39: 312-320.
Weitzman, M.L. (1973) Duality Theory for Infinite Horizon Convex Problems. Management Science 19: 783-789.
Woodford, M. (1990) Learning to Believe in Sunspots. Econometrica 58: 277-307.