The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy

Guerrazzi, Marco (2011): The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy.

Abstract

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
• Language: English
• 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

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