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

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  • Guerrazzi, Marco

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.

Suggested Citation

  • Guerrazzi, Marco, 2011. "The animal spirits hypothesis and the Benhabib-Farmer condition for indeterminacy," MPRA Paper 30673, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:30673
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    18. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    19. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, April.
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    Cited by:

    1. Marco Guerrazzi, 2016. "Increasing Returns in Matching and Labour Market Dynamics: Comments on Indeterminacy and Search Theory," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 15(1), pages 85-88, June.
    2. Gomes, Orlando, 2015. "Optimal resource allocation in a representative investor economy," Economic Modelling, Elsevier, vol. 50(C), pages 72-84.

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    More about this item

    Keywords

    Maximum problems in continuous time; indeterminate equilibrium paths; self-fulfilling prophecies.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C0 - Mathematical and Quantitative Methods - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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