My research deals with business cycles that are caused by ‘self-fulfilling prophecies’. Why does the stock market sometimes drop by 20% overnight? Why does the unemployment rate average 5% in some decades and 20% in others? Why is the U.S. dollar worth 1.3 Euros in some years but only 80 cents in others? According to the current dominant explanation of economic fluctuations the cause of all of these events must be changes in fundamentals – preferences, endowments and technology – and of these, the most important is technology shocks.
Although I do not deny that fundamental shocks may be important causes of business cycles – I argue that it is a mistake to think that they are the only causes. In my 1993 book on the Macroeconomics of Self-Fulfilling Prophecies I provided a series of micro-founded models to explain the Keynesian notion that business cycles may be driven by the ‘animal spirits’ of market participants. In that work, self-fulfilling expectations provided an independent source of economic fluctuations around a steady state governed by fundamentals. In my most recent book (see http://farmer.sscnet.ucla.edu ) I provide an extension of my earlier work to explain how the steady state itself may be a function of beliefs. This work differs from both new classical macroeconomics and new Keynesian macroeconomics, both of which maintain the idea that there is a ‘natural rate of unemployment’. My work denies the natural rate hypothesis and provides an alternative foundation to Keynes’ General Theory that I call ‘old Keynesian economics’
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Macroeconomic Theory; and Monetary Theory.
The role of information asymmetries in business cycle research; inter- temporal choice under uncertainty; macroeconomic dynamics.