DP9080 The Evolution of Endogenous Business Cycles

Author(s): Roger E A Farmer

Publication Date: August 2012

Keyword(s): indeterminacy , self-fulfilling propcheices , sunspots , unemployment

JEL(s): B22 , E20 , E32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP9080.asp

This paper distinguishes between two kinds of Endogenous Business Cycle models, and discusses the evolution from first generation EBC1 models to second generation EBC2 models. I argue that EBC1 models, which display dynamic indeterminacy, are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models, which display steady-state indeterminacy, are a more radical departure from the classical Real Business Cycle model; they represent a return to one of the most important ideas to emerge from Keynes’ (1936) General Theory; that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.