Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-17T23:28:18.536Z Has data issue: false hasContentIssue false
  • English
  • Français

THE EVOLUTION OF ENDOGENOUS BUSINESS CYCLES

Published online by Cambridge University Press:  03 July 2014

Roger E.A. Farmer
Roger E.A. Farmer*
Affiliation:
University of California, Los Angeles
*
Address correspondence to: Roger E.A. Farmer, Department of Economics, University of California, Los Angeles, 8283 Bunche Hall, Box 951477, Los Angeles, CA 90095-1477, USA; e-mail: rfarmer@econ.ucla.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper distinguishes two kinds of endogenous business cycle models: EBC1 models, which display dynamic indeterminacy, and EBC2 models, which display steady-state indeterminacy. Both strands of the literature have their origins in the sunspot literature that developed at the University of Pennsylvania in the 1980s. I argue that EBC1 models are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models provide a microfoundation for one of the most important ideas to emerge from Keynes's (1936) General Theory of Employment, Interest and Money: that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.

Keywords

UnemploymentSelf-Fulfilling PropheciesHysteresisKeynesian Economics
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 2: Complexity in Economic Systems , March 2016 , pp. 544 - 557
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Angeletos, G.-M. and La'O, J. (2013) Sentiments. Econometrica 81 (2), 739–779.Google Scholar
Azariadis, C. (1981) Self-fulfilling prophecies. Journal of Economic Theory 25 (3), 380–396.CrossRefGoogle Scholar
Beaudry, P. and Portier, F. (2006) Stock prices, news, and economic fluctuations. American Economic Review 96, 1293–1307.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R.E.A. (1994) Indeterminacy and increasing returns. Journal of Economic Theory 63, 19–46.CrossRefGoogle Scholar
Benhabib, J. and Farmer, R.E.A. (1999) Indeterminacy and sunspots in macroeconomics. In Taylor, J.B. and Woodford, M. (eds.), Handbook of Macroeconomics, pp. 387–448. Amsterdam: North-Holland.CrossRefGoogle Scholar
Benhabib, J., Wang, P., and Wen, Y. (2012) Sentiments and Aggregate Demand Fluctuations. NBER working paper 18413.CrossRefGoogle Scholar
Blanchard, O.J. and Summers, L.H. (1986) Hysteresis and the European unemployment problem. In Fischer, S. (ed.), NBER Macroeconomics Annual, vol. 1, pp. 15–90. Boston: National Bureau of Economic Research.Google Scholar
Blanchard, O.J. and Summers, L.H. (1987) Hysteresis in unemployment. European Economic Review 31, 288–295.CrossRefGoogle Scholar
Brown, A. (2010) Essays in Macroeconomics and International Trade. Ph.D. Thesis, University of California, Los Angeles.Google Scholar
Cass, D. and Shell, K. (1983) Do sunspots matter? Journal of Political Economy 91, 193–227.CrossRefGoogle Scholar
Christiano, L., Eichenbaum, M., and Evans, C. (2005) Nominal rigidities and the dynamics effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.CrossRefGoogle Scholar
Diamond, P.A. (1982a) Aggregate demand management in search equilibrium. Journal of Political Economy 90, 881–894.CrossRefGoogle Scholar
Diamond, P.A. (1982b) Wage determination and efficiency in search equilibrium. Review of Economic Studies 49, 217–227.CrossRefGoogle Scholar
Diamond, P.A. (1984) Money in search equilibrium. Econometrica 52, 1–20.CrossRefGoogle Scholar
Farmer, R.E.A. (1999) The Macroeconomics of Self-Fulfilling Prophecies, 2nd ed.Cambridge, MA: MIT Press.Google Scholar
Farmer, R.E.A. (2002) Why does the data reject the Lucas critique? Annales d'Economie et de Statistiques 67/68, 111–129.CrossRefGoogle Scholar
Farmer, R.E.A. (2006) Old Keynesian Economics. Paper presented at a conference in honor of Axel Leijonhufvud, held at UCLA on August 30th 2006. Mimeo, University of California, Los Angeles.Google Scholar
Farmer, R.E.A. (2008a) Aggregate demand and supply. International Journal of Economic Theory 4 (1), 77–94.CrossRefGoogle Scholar
Farmer, R.E.A. (2008b) Old Keynesian economics. In Farmer, R. E. A., (ed.) Macroeconomics in the Small and the Large, Chap. 2, pp. 23–43. Cheltenham, UK: Edward Elgar.CrossRefGoogle Scholar
Farmer, R.E.A. (2010a) Expectations, Employment and Prices. New York: Oxford University Press.Google Scholar
Farmer, R.E.A. (2010b) How the Economy Works: Confidence, Crashes and Self-fulfilling Prophecies. New York: Oxford University Press.Google Scholar
Farmer, R.E.A. (2010c) How to reduce unemployment: A new policy proposal. In Carnegie Rochester Conference Issue, Journal of Monetary Economics 57 (5), 557–572.CrossRefGoogle Scholar
Farmer, R.E.A. (2012a) Animal spirits, persistent unemployment and the belief function. In Frydman, R. and Phelps, E.S. (ed.), Rethinking Expectations: The Way Forward for Macroeconomics, pp. 251–276. Princeton, NJ: Princeton University Press.Google Scholar
Farmer, R.E.A. (2012b) Confidence, crashes and animal spirits. Economic Journal 122 (559).CrossRefGoogle Scholar
Farmer, R.E.A. (2012c) The stock market crash of 2008 caused the Great Recession: Theory and evidence. Journal of Economic Dynamics and Control 36, 697–707.CrossRefGoogle Scholar
Farmer, R.E.A. (2013a) Animal spirits, financial crises and persistent unemployment. Economic Journal 123 (568), 317–340.CrossRefGoogle Scholar
Farmer, R.E.A. (2013b) The Stock Market Crash Really Did Cause the Great Recession. NBER working paper 19391 and CEPR discussion paper 9630.Google Scholar
Farmer, R.E.A. and Guo, J.T. (1994) Real business cycles and the animal spirits hypothesis. Journal of Economic Theory 63, 42–73.CrossRefGoogle Scholar
Farmer, R.E.A. and Plotnikov, D. (2012) Does fiscal policy matter? Blinder and Solow revisited. Macroeconomic Dynamics 16 (Supplement 1), 149–166.CrossRefGoogle Scholar
Farmer, R.E.A. and Woodford, M. (1984) Self-fulfilling Prophecies and the Business Cycle. Caress working paper 84-12.Google Scholar
Farmer, R.E.A. and Woodford, M. (1997) Self-fulfilling prophecies and the business cycle. Macroeconomic Dynamics 1 (4), 740–769.CrossRefGoogle Scholar
Friedman, M. (1957) A Theory of the Consumption Function. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Frydman, R. and Goldberg, M.D. (2011) Beyond Mechanical Markets. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Galí, J., Gertler, M., and Salido, D.L. (2007) Markups, gaps and the welfare costs of business cycle fluctuations. Review of Economics and Statistics 89 (1), 44–59.CrossRefGoogle Scholar
Gelain, P. and Guerrazzi, M. (2010) A DSGE Model from the Old Keynesian Economics: An Empirical Investigation. Working paper CDMA10/14, Centre for Dynamic Macroeconomic Analysis, University of St. Andrews.Google Scholar
Guerrazzi, M. (2011) Search and stochastic dynamics in the old keynesian economics: A rationale for the Shimer puzzle. Metroeconomica 62 (4), 561–586.CrossRefGoogle Scholar
Guerrazzi, M. (2012) The “Farmerian” approach to ending finance-induced recession: Notes on stability and dynamics. Economic Notes by Banca Monte dei Paschi di Siena SpA 41 (1/2), 81–99.Google Scholar
Hall, R.E. (1997) Macroeconomic fluctuations and the allocation of time. Journal of Labor Economics 15 (1), S223–S250.CrossRefGoogle Scholar
Heathcote, J. and Perri, F. (2012) Wealth and Volatility. Mimeo, Federal Reserve Bank of Minneapolis.Google Scholar
Howitt, P. and McAfee, R.P. (1987) Costly search and recruiting. International Economic Review 28 (1), 89–107.CrossRefGoogle Scholar
Kashiwagi, M. (2010) Search Theory and the Housing Market. Ph.D. Thesis, University of California, Los Angeles.Google Scholar
Keynes, J.M. (1936) The General Theory of Employment, Interest and Money. London: MacMillan and Co. [1973 ed. published for the Royal Economic Society, Cambridge].Google Scholar
King, R.G., Plosser, C.I., and Rebelo, S.T. (1988) Production, growth, and business cycles: I. The basic neoclassical model. Journal of Monetary Economics 21(March/May), 195–232.CrossRefGoogle Scholar
Kocherlakota, N. (2011) Bubbles and Unemployment. Mimeo, Federal Reserve Bank of Minneapolis.Google Scholar
Kocherlakota, N. (2012) Incomplete Labor Markets. Mimeo, Federal Reserve Bank of Minneapolis.Google Scholar
Kydland, F.E. and Prescott, E.C. (1982) Time to build and aggregate fluctuations. Econometrica 50, 1345–1370.CrossRefGoogle Scholar
Lindbeck, A. and Snower, D.J. (1986) Wage setting, unemployment and insider–outsider relations. American Economic Review 76 (2), 235–239.Google Scholar
Long, J.B. and Plosser, C.I. (1983) Real business cycles. Journal of Political Economy 91 (1), 39–69.CrossRefGoogle Scholar
Lucas, R.E. Jr. (1972) Expectations and the neutrality of money. Journal of Economic Theory 4, 103–124.Google Scholar
Lucas, R.E. Jr. (1987) Models of Business Cycles. Oxford, UK: Basil Blackwell.Google Scholar
Miao, J., Wang, P., and Xu, Z. (2012) Stock Market Bubbles and Unemployment. Mimeo, Boston University.CrossRefGoogle Scholar
Michaillat, P. and Saez, E. (2013) A Model of Aggregate Demand and Unemployment. NBER working paper 18826.Google Scholar
Michaillat, P. and Saez, E. (2014) An Economical Business Cycle Model. NBER working paper 119777.Google Scholar
Mortensen, D.T. (1970) Job search, the duration of unemployment, and the Phillips curve. American Economic Review 60 (5), 847–862.Google Scholar
Phelps, E.S. (1994) Structural Slumps. Cambridge, MA: Harvard University Press.Google Scholar
Pigou, A.C. (1929) Industrial Fluctuations, 2nd ed.London: Macmillan.Google Scholar
Pissarides, C.A. (1976) Job search and participation. Economica 43, 333–349.CrossRefGoogle Scholar
Plotnikov, D. (2013) Three Essays on Macroeonomics with Incomplete Factor Markets. Ph.D. Thesis, University of California, Los Angeles.Google Scholar
Rogerson, R., Shimer, R., and Wright, R. (2005) Search-theoretic models of the labor market: A survey. Journal of Economic Literature 43, 959–988.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2011) Pegs and Pain. NBER working paper 16847.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2012) Pegs, Downward Wage Rigidity and Unemployment. NBER working paper 18223.Google Scholar
Smets, F. and Wouters, R. (2007) Shocks and frictions in U.S. business cycles: A Bayesian DSGE approach. American Economic Review 97 (3), 586–606.CrossRefGoogle Scholar