Why the Indeterminacy Agenda Matters in the Real World


In a couple of weeks, I will be presenting two lectures at the 20th edition of the Axel Leijonhufvud Summer School in Trento Italy. I’ve also just completed a piece for the Oxford Research Encyclopedia of Economics and Finance on the Indeterminacy Agenda in Macroeconomics. That article is available here as an NBER paper or as an ungated piece directly from my website here. The article shows how far the indeterminacy agenda has advanced modern macroeconomics and explains its relevance for economic policy.

In the article, I draw a distinction between dynamic indeterminacy and steady-state indeterminacy. Dynamic indeterminacy is the idea that, in DSGE models, there frequently are not enough initial conditions to pin down the solution to the dynamic path that characterizes a dynamic equilibrium. Jess Benhabib and I surveyed that literature back in 1999 in an article for the Handbook of Macroeconomics. The working paper version is available here. That literature was important, but it did not fulfill its original promise: to act as a micro foundation to Keynesian economics.

The dynamic indeterminacy literature introduced the idea that ‘animal spirits’ can act an independent driver of business cycles. But it missed completely the idea of involuntary unemployment as a steady state equilibrium.

In a new literature on steady-state indeterminacy, I have introduced a version of search theory that is distinct from the work for which Diamond, Mortensen and Pissarides won the Nobel Prize in 2010. I call their work, and the work that evolved from it, Classical Search Theory. In my alternative, Keynesian Search Theory, explained in my 2016 book Prosperity for All, I drop the idea that the wage is determined by bargaining and I replace it with employment that is determined in the asset markets by the animal spirits of investors. Along with a series of co-authors, we have written a series of papers explaining that idea which you can find linked here. Some of these articles are theoretical: others show the relevance of the idea of steady-state indeterminacy to the real world. These ideas have important implications for the policies we must put in place to head off and combat the next Great Recession.

As I say in the closing section of The Indeterminacy Agenda in Macroeconomics, in a review of the empirical evidence that Giovanni Nicolò and I present here and here, “It takes a model to beat a model. And the indeterminacy agenda wins the day by a decisive margin.”