Animal Spirits, Persistent Unemployment And The Belief Function

This paper presents a theory of the monetary transmission mechanism in an old-Keynesian model with multiple equilibrium unemployment rates. The model has two equations in common with the new-Keynesian model; the optimizing IS curve and the policy rule. It differs from the new-Keynesian model by replacing the Phillips curve with a belief function to determine expectations of nominal income growth. The author estimates the new and old-Keynesian models using U.S. data and the author shows that the old-Keynesian model fits the data better than its new-Keynesian competitor.