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Macroeconomics of Self-Fulfilling Prophecies

ISBN-10: 0262062038

ISBN-13: 9780262062039

Edition: 2nd 1999

Authors: Roger E. A. Farmer

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Farmer argues that macroeconomics is best viewed as the study of equilibrium environments in which the welfare theorems break down. This 2nd edition includes end of chapter problems, and a new chapter on business fluctuations in multisector models.
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Book details

List price: $60.00
Edition: 2nd
Copyright year: 1999
Publisher: MIT Press
Publication date: 6/16/1999
Binding: Hardcover
Pages: 292
Size: 6.50" wide x 9.50" long x 1.00" tall
Weight: 1.496
Language: English

Roger Farmer is Assistant Professor of Economics at the University of Pennsylvania.

Preface to Second Edition
Equilibrium Theory as an Approach to Macroeconomics
Preview of the Argument
Regular Case
Irregular Case
Concluding Remarks
Linear Difference Equations: Part 1
Linearizing Nonlinear Models
Nonlinear Models to Represent Economies
Linearizing Autonomous Equations
Linearizing Nonautonomous Equations
Example of Linearization: The Solow Model
Solving First-Order Linear Models
First-Order Deterministic Equations
First-Order Stochastic Equations
Sequences of Probability Distributions
The Solow Model Revisited
Solving Higher-Order Linear Models
Eigenvalues and Eigenvectors
Higher-Order Deterministic Equations
Diagonalizing Systems of Nonstochastic Equations
Stochastic Vector Difference Equations
Example of a Vector System--The Behavior of the Solow Residual
Concluding Remarks
Linear Difference Equations: Part 2
Linear Rational Expectations Models
Optimal Growth as an Illustration of a Rational Expectations Model
Solving Linear Rational Expectations Models
Different Types of Rational Expectations Models
Case of a Regular Equilibrium
Solving a Rational Expectations Model by Iterating into the Future
Completing the Solution by Solving Equations that Depend on the Past
Optimal Growth Model and the Solow Model Compared
Cross-equation Restrictions and the Lucas Critique
Dynamics of a Monetary Model--A Second Example
Solving the Example Explicitly
Lucas Critique and the Cross-equation Restrictions
Irregular Solutions
Concluding Remarks
General Equilibrium Theory under Certainty
Idea of Equilibrium
Theory of Consumer Choice
Assumptions about Preferences
Consumer's Problem
Excess Demand Functions
Individual Excess Demand Functions
Aggregate Excess Demand Functions
Equilibria and Their Properties
Some Definitions and Development of Notation
Geometry of Equilibrium
Debreu-Sonnenschein-Mantel Theorem
General Equilibrium Theory and Efficient Allocations of Resources
First Welfare Theorem
Second Welfare Theorem
Concluding Remarks
Infinite Horizon Economies and Representative Agents
Representative Agent Economy
Assumptions about Structure
Assumptions about Preferences
Budget Sets and Market Structure
Consumer's Problem
Competitive Equilibrium and the Planner's Problem
Competitive Equilibrium
Planner's Problem
Using the Representative Agent Model to Explain Time Series Data
Removing the Trend from Data
Simple RBC Model and Its Implications
Regression on a Common Trend: What the Model Tells Us to Do
Hodrick-Prescott Filter: What RBC Economists Actually Do
Calibration and Summary Statistics: How RBC Theorists Measure Success
Concluding Remarks
Transversality Condition
Infinite Horizon Economies and Overlapping Generations
Structure of the Overlapping Generations Economy
Consumer's Problem
Problem of a Young Agent
Problem of an Old Agent
Example of a Pareto Inferior Equilibrium
Case of Early Endowments
Case of Late Endowments
Institutions that May Improve Allocations
Set of Equilibria in the Overlapping Generations Model
Equilibria as Solutions to Difference Equations
Stationary Equilibria
Classifying Economies by Types of Stationary Equilibria
Dynamic Equilibria
Some Questions about the Model
Why Does the First Welfare Theorem Break Down?
When Does Indeterminacy Occur?
When Are Equilibria Efficient?
More General Examples of Overlapping Generations Economies
Kehoe-Levine Approach
Indeterminacy in the OG Model
Concluding Remarks
Infinite Horizon Economies with Nonconvexities
Growth Model with Increasing Returns
Equations That Characterize an Equilibrium
Behavior of the Representative Family
Interpretation 1: Externalities in Production
Interpretation 2: Monopolistic Competition
Empirical Evidence for Increasing Returns
Equilibria in the Increasing Returns Economy
Finding a Balanced Growth Path
Approximate Linear Model
Comparing the Theoretical Properties of RA and IR Models
Why Does the IR Model Display Different Dynamics?
RA Model: An Example of a Regular Equilibrium
IR Model: An Example of an Irregular Equilibrium
Comparing Some Empirical Predictions of RA and IR Models
Contemporaneous Statistics
Dynamic Responses--The Impulse Response Function
Concluding Remarks
Some Recent Developments
New Evidence against Big Increasing Returns
Nonseparable Preferences
Solving the Consumer's Problem
Equations That Characterize Equilibrium
Two-Sector Models
Production Possibilities Frontier
Behavior of the Representative Family
Indeterminacy and the Two-Sector Model
Procyclical Consumption
Calibrated Two-Sector Model
Concluding Remarks
General Equilibrium Theory and Uncertainty
Debreu's Formulation of the Problem
Preferences under Uncertainty
Budget Constraints
Arrow's Formulation of the Problem
Trade in Financial Securities
Complete and Incomplete Markets
Multiple Budget Constraints and Incomplete Markets
Infinite Horizon Economies with Uncertainty
Asset Pricing in Lucas Tree Economies
Digression on Market Structure
Asset Pricing in the Representative Agent Case
Concluding Remarks
Do Sunspots Matter?
Complete and Incomplete Participation
Setting up the Environment
Sunspot Theorems
Example of a Macroeconomic Model Where Sunspots Matter
Description of the Environment
Set of Equilibria
Supporting Sunspot Equilibria with Beliefs
Sunspots, Bubbles, and Regular Equilibria
Concluding Remarks
Macroeconomic Models of Money
Rate of Return Dominance and Legal Restrictions Theory
Some Quick Fixes to Rate of Return Dominance
Models of Money
Budget Sets: the Opportunity Cost of Holding Money
Objective Functions: Cash in Advance and Its Relationship to Money in the Utility Function
Dynamics of a Cash-in-Advance Model
Different Types of Monetary Policy
Government's Budget Constraints
Typology of Policy Regimes
Equilibrium under Interest Rate Control
Policy Mix A: Fixed Interest Rates and Zero Debt
Equilibrium of the Real Economy under Interest Rate Control
Equilibrium Rates of Change of Nominal Variables under Interest Rate Control
Indeterminacy of the Nominal Scale of the Economy under Interest Rate Control
Economics of Indeterminacy under Interest Rate Control
Equilibrium under a Fixed Money Growth Rate Rule
Policy Mix B: Fixed Money Growth Rate and Zero Debt
Equilibrium of the Real Economy with a Fixed Money Growth Rate
Example of Indeterminate Equilibria in a Simple Economy
Concluding Remarks
Applied Monetary Theory
Monetary Facts: What There Is to Explain
Simple Monetary Model: Using Equilibrium Theory to Explain the Facts
Modeling the Exchange Process
Formalizing the Exchange Technology
How to Describe an Equilibrium
How Do Equilibria Behave?
Choosing Functional Forms
What Do Equilibria Look Like?
Alternative Views of the Money-Income Correlation?
What Does All of This Have to Do with Sticky Prices?
Concluding Remarks