Introduction

• Author: Jess Benhabib,Makoto Yano,Kazuo Nishimura
• Published date: 01 March 2019
• DOI: http://doi.org/10.1111/ijet.12211
• Date: 01 March 2019

Introduction

Jess Benhabib, Kazuo Nishimura and Makoto Yano

This collection of papers is dedicated, with admiration and affection, to Roger Farmer who is one of

the most original economists of his generation working on business cycles and economic

fluctuations. His work demonstrates thoughtfulness, insight, and extraordinary skills in economic

theory, empirical work, and applied econometrics.

Roger has been principally influenced by the seminal works of David Cass and Karl Shell (Shell

1977; Cass and Shell 1983) and Costas Azariadis (1981), who first demonstrated the possibility of

sunspotsand self-fulfilling prophecies in general equilibriummodels. In his book, The Macroeconomics

of Self-FulfillingProphecies (1993), Roger argued thatself-fulfilling beliefs, along with thefundamentals

of technology and preferences,are necessary to determine dynamic macroeconomic equilibria. Belief

functions therefore shouldbe treated as primitives, with parameters to be estimatedalong with other

fundamental parameters of the underlying macroeconomic model.

After some initial insightful papers at the beginning of his career (Deficits and cycles 1986;

Money and contracts 1988 RINCE preferences 1990), Roger introduced the possibility of multiple

equilibria and sunspots into the study of standard equilibrium business cycles under rational

expectations (see Benhabib and Farmer 1994, 1996, 2000; Farmer and Guo 1994, 1995). What

distinguished this work was Roger’s commitment to empirically validate the plausibility of the role of

multiple equilibria and self-fulfilling beliefs in dynamic macroeconomic models under rational

expectations. Roger has continued to develop the literature on the empirical testing of indeterminacy

in DSGE models, and to develop new methods for studying them (see, e.g., Beyer and Farmer 2007;

Beyer et al. 2008 Farmer et al. 2015). He also studied monetary models with indeterminacy (RED

2000, with Benhabib), as well as monetary policy and Taylor Rules in the context of regime-switching

policies with Waggoner and Zha (2009, 2010).

Roger’s recent work has made a further leap and pushed the indeterminacy-animal spirits

literature in a new direction. In a series of papers, he has advocated aggregate demand and sunspot-

driven fluctuations by allowing employment to be demand-determined. This is a new and bold

approach to employment fluctuations which Roger has, as usual, studied both theoretically and

empirically, to make sure that data disciplines his theoretical findings. He has also derived the

implications of this approach for asset price movements and their relation to stock market wealth

(see Farmer 2013; EJ 2012, 2014; JME 2010 The Manchester School 2015 Oxford Bulletin 2015

Macroeconomic Dynamics 2012, 2012 (with D. Plotnikov), 2016).

Roger’s work has had an impact in policy circles and in the press, offering a fresh perspective on

economic fluctuations, especially in view of the Great Recession. Roger has now emerged as an

important voice and commentator on macroeconomic policy and is having an influence as

demonstrated by his various op-ed pieces in the Financial Times, the Guardian Economic Blog and

VoxEU.

In the second edition of his book, The Macroeconomics of Self-fulfilling Prophecies (1999), Roger

writes that his motivation for writing his book was that he ‘‘...wanted to persuade [his] colleagues

doi: 10.1111/ijet.12211

International Journal of Economic Theory 15 (2019) 3–8 ©IAET 3

International Journal of Economic Theory