Confidence, Crashes and Animal Spirits [report]

Roger E.A. Farmer
2009 unpublished
This paper argues that the equilibrium business cycle theory which has guided macroeconomics for the past thirty five years is flawed. I introduce an alternative paradigm that retains the main message of Keynes' General Theory and which reconciles that message with Walrasian economics. I argue that there are two market failures in the labor market: A lemons problem and an externality. I show how those two problems lead to inefficient equilibria in which the unemployment rate is determined by
more » ... self-fulfilling beliefs of stock market participants.
doi:10.3386/w14846 fatcat:fk7swiozknhbrcwouxe32x7emy