## Working Papers

Last updated 09/01/2016. Pricing Assets in an Economy with Two Types of People. This paper constructs a general equilibrium model with two types of people where asset price fluctuations are caused by random shocks to the price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption and financial assets across types. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset prices. NBER Working Paper 22228, HERE, CPER Discussion Paper 11253, HERE, Open link HERE.

Last updated 02/14/2017. Animal Spirits in a Monetary Economy, Joint with Konstantin Platonov of UCLA. We integrate Keynesian economics with general equilibrium theory in a new way. Our approach differs from the prevailing New Keynesian paradigm in two ways. First, our model displays steady state indeterminacy. This feature allows us to explain persistent unemployment which we model as movements among the steady state equilibria of our model. Second, our model displays dynamic indeterminacy. This feature allows us to explain the real effects of nominal shocks by selecting a dynamic equilibrium where price are slow to respond to unanticipated money supply disturbances. Price rigidity arises as part of a rational expectations equilibrium in which the equilibrium is selected by beliefs. To close our model, we introduce a new fundamental that we refer to as the belief function. Open link HERE.

Last updated 09/01/2016. The Theory of Unconventional Monetary Policy, Joint with Pawel Zabczyk of the Bank of England. This paper is about the effectiveness of qualitative easing, a form of unconventional monetary policy that changes the risk composition of the central bank balance sheet with the goal of stabilizing economic activity. We construct a general equilibrium model where agents have rational expectations and there is a complete set of financial securities, but where some agents are unable to participate in financial markets. We show that a change in the risk composition of the central bank's balance sheet will change equilibrium asset prices and we prove that, in our model, a policy in which the central bank stabilizes non-fundamental fluctuations in the stock market is Pareto improving and self-financing. NBER Working Paper 22135, HERE, CPER Discussion Paper 11196, HERE, Open link HERE.

Last updated 09/01/2016. Global Sunspots and Asset Prices in a Monetary Economy. (See "Asset Prices in an Economy with Two Types of People" which builds on and supersedes this working paper.)

Last updated 09/01/2016. Asset Prices in a Lifecycle Economy. (See "Asset Prices in an Economy with Two Types of People" which builds on and supersedes this working paper.)

Last updated 09/01/2016. The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World. (See "Asset Prices in an Economy with Two Types of People" which fixes a fundamental error with [6]. The paper , "The Inefficient Markets Hypothesis...", coauthored with Carine Nourry and Alain Venditti, [6], claims to generate equilibria, driven by non-fundamental shocks. That claim is incorrect as the model in the paper fails to equate the marginal rates of substitution of each type of agent in every state and consequently, it does not fulfill its claim to generate sunspot equilibria in a model with complete financial markets. I am grateful to Markus Brunnermeir and Valentin Haddad for discussions on this point. In my new paper, [1], I have built on the contribution of the joint paper [6], by using the assumption that there are two types of people. In [1], I solve the problem of the earlier paper by introducing a nominal asset. In [1], there are complete financial markets AND sunspot equilibria.

Last updated 09/01/2016. Qualitative Easing: How it Works and Why it Matters. This paper has been superseded by "The Theory of Unconventional Monetary Policy", [3], coauthored with Pawel Zabczyk. "The Theory of Unconventional Monetary Policy" was written after extensive discussions with Pawel Zabczyk during, and following, Farmer’s visit, as Senior Houblon-Norman Fellow to the Bank of England in 2013. In contrast to [7], Farmer and Zabczyk [3] introduces money and it provides the theory that explains why Qualitative Easing is effective. Earlier working papers that explain why financial markets may be Pareto Inefficient include the working papers, Farmer [4], [5], [13], [14] and Farmer et al [6] listed on this page.

Last updated 05/09/2016. The Great Depression . This is a working paper version of material from mybook,

*Expectations Employment and Prices*. It uses a search model of the labor market to provide a micro-founded interpretation of Keynes' explanation of the Great Depression.Last updated 09/21/2006. Old Keynesian Economics. This is the working paper version of a paper prepared for a conference in honor of Axel Leijonhufvud, held at UCLA on August 30th and 31st 2006. The paper is published in

*Macroeconomics in the Small and the Large*, Roger E. A Farmer ed., Edward Elgar, London, 2008Last updated 09/21/2006. A method to generate structural impulse-responses for measuring the effects of shocks in structural macro models. Joint with Andreas Beyer, ECB working paper #586, February 2006. We develop a technique for analyzing the response dynamics of economic variables to structural shocks in linear rational expectations models.

Last updated 09/05/2006. Shooting the Auctioneer. Joint with Andrew Hollenhorst. This paper uses a relatively standard DSGE model with sticky wages to account for labor market facts. Using a second-order approximation to the policy function we simulate moments of an artificial economy with and without sticky wages. We compute the welfare costs of the sticky wage equilibrium and find them to be small.

On the Indeterminacy of New-Keynesian Economics. Joint with Andreas Beyer, ECB working paper #323. This is an extension of On the Indeterminacy of Determinacy and Indeterminacy

*American Economic Review,*97(1) 2007, pp. 524-529. It generalizes the argument to a class of three equation linear models. A version of the working paper is published in*Macroeconomics Dynamics 12, S1, 2008 pp 60-74*under the title What we Don't Know about The Monetary Transmission Mechanism and why we Don't Know it”.Business Cycles with Heterogeneous Agents. May 2002. This is part of a project that studies the implications of long-lived stochastic overlapping generations models. The main contribution of the paper is a method for solving these models in closed form. I haven't revised the paper in a while although it is still on my agenda.

Fiscal Policy, Equity Premia and Heterogeneous Agents, May 2002. This paper explores the equity premium puzzle in a long-lived agent model and it argues that market incompleteness can be captured by rapid change in the traders who participate in the equity markets.

Last Updated 05-25-2016