Comments on « Confidence, Crashes and Animal

spirits »

By Roger Farmer

R. Guesnerie

Marseille, 26th March 2011

The background

• Brings back to an old question. – Market virtues and stability

• Say versus Sismondi. • Walras

• Coming back on the scene at each crisis– 1929, Keynes…– 2008.

• RF : – reformulates two important ideas of Keynes’ general

theory. – short run equilibrium and expectational coordination.

Keynes and Keynesians

• About Keynes’s message– One dimension : doubts on the virtues of short run

markets adjustments. • Lowering wage to combate unemployment is wrong.

– Other dimension : doubts on the quality of expectational coordination.

• Beauty contest story.

• Keynesians have put emphasis on one dimension. – The neo-classical synthesis, IS-LM, fixed prices.– Sunspot models have been called Keynesian.

The reference model.

• The (purely) neo-classical model.– A RBC model with fixed investment.

• A continuum of identical agents• Minor remark on price normalisation.

– A succession of static equilibria• Equilibrium employment is constant.• Production trigerred by productivity shocks.

– Apparently expectations do not matter • Not quite true : Trade on capital and expectations.

• The reference model with search. – L(t)=TV(t)H(t) ?= X(t)– Frictional unemployment is optimal, – The solution has the same features

Roger’s Keynes

• A radical short run’s Keynesianism. – The search market has a continuum of equilibria. – With one question : does the fact that the standard way of

closing the « search market modulus » is unsatisfactory justifies not closing it ?

– Some problems with the representative consumer hypothesis.• Trade in capital between employed or non employed?

• A standard solution for expectational coordination. – Self-fulfilling beliefs close the model. – Not a problem, but here a solution ?– Question..Is expectational coordination robust in some sense

About Keynes, expectational coordination

• Two dimensions of a critical assesment. ?• The short term performance of the market algorithm. • The quality of expectational coordination.

• The challenge of explaining expectational coordination.

• The standard way : the REH• Bad or good : the implicit assumption that it is equally good

across situations : « unbelievable »?• A key issue in finance and macroeconomics.

• How to do ?– Robustness cirteria (evolutive or « eductive »

learning. – Alternative and less deterministic views ?