Balance in the macro models

Macroeconomics of Self-Fulfilling Prophecies. Second Edition
May 26, 2000

This is the second edition of a graduate text in macroeconomics. Like the first, it is readable, pitched at an appropriate level and, while concerned with macroeconomic theory, it blends empirical evidence at crucial stages in the argument. It also takes a clear position by making the existence of multiple equilibria fundamental to macroeconomics. Indeed, it is the text to use with this approach. The major changes since the first edition include a new chapter on the recent relevant literature and a set of exercises at the end of each chapter with answers that are available on the web.

Roger Farmer presents a variety of general-equilibrium models based on either infinitely lived representative agents or overlapping generations, and he focuses on those with multiple rational-expectations equilibria.

The concern with multiplicity explains the title of the book as each equilibrium in this context has the character of a self-fulfilling belief. It is also important for his argument in two ways. First, it raises a question of how equilibrium selection occurs. Second, it helps to reopen the question of government intervention at the macro level because some of these equilibria can be inefficient.

In these ways the book expounds an alternative view to that of real business-cycle theory. But it is not the only view. The causes of market failure in Farmer's models are typically due either to the existence of externalities or the dynamic structure of the economy. There are other kinds of failure in the macro literature, like those that arise when there are informational asymmetries or when agents set prices. These are not discussed by Farmer, and this makes it difficult to assign the book as the central text on a graduate macro course. Nevertheless, I will use it for important sections of my course.

Shaun P. Hargreaves Heap is senior lecturer in economics, University of East Anglia.

Macroeconomics of Self-Fulfilling Prophecies. Second Edition

Author - Roger E. A. Farmer
ISBN - 0 262 06203 8
Publisher - MIT Press
Price - £24.95
Pages - 300

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