Real Business Cycles and the Animal Spirits Hypothesis

Capacity Utilization under Increasing Returns to Scale

“…Although it was shown by Farmer and Guo [28] that models with indeterminacy driven solely by i.i.d expectation shocks can perform at least as well as a standard RBC model driven by persistent technology shocks in explaining the basic business cycle facts of the data and can outperform a standard RBC model in explaining the propagation mechanisms of the average U.S. business cycles, it is not clear whether this type of model can generate sufficient fluctuations around the business cycle frequency. For example, the parameterization adopted by Farmer and Guo [28] in their model as an attempt to match the second moments of the data produces cycles at frequency of 0.0163 (cycles per quarter), implying a periodicity of 61 quarters per cycle.…”

“…2 This type of model can better explain the cyclical properties of the U.S. time series than the standard RBC model type, which assumes constant returns-to-scale production technologies (e.g., see Farmer and Guo [28]). However, in order to generate multiple equilibria in a onesector RBC model, the degree of increasing returns-to-scale must be large enough to imply that the aggregate labor demand curve should be upwardsloping and steeper than the labor supply curve (Benhabib and Farmer [11], and Schmitt-Grohe [45]).…”

“…To show that the parameter region thus specified for ' is not empty for realistic parameter values of the model, consider the parameterization of Farmer and Guo [28] in a quarterly model: #=0 (Hansen's [33] indivisible labor), :=0.3, ;=0.99, and $=0.025 (implying %=1.4). Figure 1 shows the regions of indeterminacy as functions of ' when each of these four parameters is allowed to vary while holding the other three constant.…”

Economies of Scale in Banking, Confidence Shocks, and Business Cycles

“…What indeterminacy does depend on is monetary policy and 2 The degree of increasing returns needed for indeterminacy in environments with one sector of production [e.g. Farmer and Guo (1994) and Gali (1994)] far exceeds the estimates of Basu and Fernald (1997). Furthermore, Farmer (1993) shows that indeterminacy arises in cash-in-advance economies only for weak degrees of intertemporal substitution.…”

Animal spirits and monetary policy

“…This literature started with Azariadis(1981) and was further extended by Farmer and others (see Farmer and Guo(1994), Benhabib and Farmer(1994). These authors aim at developing rigorous models of the business cycle in which expectations are rational and aggregate fluctuations are driven by animal spirits.…”