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Animal spirits, investment and unemployment: An old Keynesian view of the Great Recession

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  • Guerrazzi, Marco

Abstract

This paper develops a DSGE model with investment and capital accumulation build along demand-driven explanations of the Great Recession. Specifically, following Farmer (2013), I set forth a search framework in which households decide about consumption while firms decide about recruiting effort as well as investment. This setting closed with market clearing in good and asset markets has one less equation than unknowns. Therefore, in order to solve such an indeterminacy, I assume that investment is driven by self-fulfilling expectations about the adjustment cost of capital. Consistently with the view of business cycles pushed by stock price fluctuations, this model has the potential to provide a more comprehensive rationale of the consumption-investment patterns observed during the years of the crisis.

Suggested Citation

  • Guerrazzi, Marco, 2015. "Animal spirits, investment and unemployment: An old Keynesian view of the Great Recession," MPRA Paper 64540, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:64540
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    References listed on IDEAS

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    1. repec:mul:je8794:doi:10.1429/74179:y:2012:i:3:p:369 is not listed on IDEAS
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    7. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters, in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press.
    8. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, April.
    9. Marco Guerrazzi & Paolo Gelain, 2015. "A demand-driven search model with self-fulfilling expectations: the new 'Farmerian' framework under scrutiny," International Review of Applied Economics, Taylor & Francis Journals, vol. 29(1), pages 81-104, January.
    10. Michael D. Hurd & Susann Rohwedder, 2010. "Effects of the Financial Crisis and Great Recession on American Households," NBER Working Papers 16407, National Bureau of Economic Research, Inc.
    11. Dmitry Plotnikov, 2014. "Hysteresis in Unemployment and Jobless Recoveries," IMF Working Papers 2014/077, International Monetary Fund.
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    15. Roger E. A. Farmer, 2015. "The Stock Market Crash Really Did Cause the Great Recession," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(5), pages 617-633, October.
    16. Roger E.A. Farmer, 2013. "Animal Spirits, Financial Crises and Persistent Unemployment-super-," Economic Journal, Royal Economic Society, vol. 0, pages 317-340, May.
    17. Marco Guerrazzi, 2012. "Expectations, Employment and Prices: A Suggested Interpretation of the New «Farmerian» Economics," Politica economica, Società editrice il Mulino, issue 3, pages 369-395.
    18. Brady Lavender & Nicolas Parent, 2012. "The U.S. Recovery from the Great Recession: A Story of Debt and Deleveraging," Bank of Canada Review, Bank of Canada, vol. 2012(Winter), pages 13-26.
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    20. Christelis, Dimitris & Georgarakos, Dimitris & Jappelli, Tullio, 2015. "Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 21-41.
    21. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
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    24. Michael D. Hurd & Susann Rohwedder, 2010. "Effects of the Financial Crisis and Great Recession on American Households," NBER Working Papers 16407, National Bureau of Economic Research, Inc.
    25. Paolo Gelain & Marco Guerrazzi, 2010. "A DSGE Model from the Old Keynesian Economics: An Empirical Investigation," CDMA Working Paper Series 201014, Centre for Dynamic Macroeconomic Analysis.
    26. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
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    Cited by:

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    2. Marco Guerrazzi, 2023. "Optimal growth with labor market frictions," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(4), pages 961-987, December.
    3. Mbekeni Lutho & Phiri Andrew, 2020. "South African Unemployment in the Post-Financial Crisis Era: What are the Determinants?," Folia Oeconomica Stetinensia, Sciendo, vol. 20(2), pages 230-248, December.

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    More about this item

    Keywords

    Investment; Capital accumulation; Finance-induced recession; Search; DSGE Models;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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