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Animal Spirits and the Economy George A. Akerlof ISEO June 23, 2010

Animal Spirits and the Economy George A. Akerlof ISEO June 23, 2010. Introduction. Robert Shiller. Brief history of economic thought. Watered down General Theory . Vulnerable to attack. Full employment. Macroeconomics: deviations from full employment. Frictions. Animal Spirits.

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Animal Spirits and the Economy George A. Akerlof ISEO June 23, 2010

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  1. Animal Spirits andthe EconomyGeorge A. Akerlof ISEOJune 23, 2010

  2. Introduction • Robert Shiller. • Brief history of economic thought. • Watered down General Theory. • Vulnerable to attack.

  3. Full employment. • Macroeconomics: deviations from full employment. • Frictions.

  4. Animal Spirits • Confidence. • Fairness. • Corruption. • Money Illusion. • Stories.

  5. Confidence • Not just a prediction. • Also involves Trust.

  6. Fairness • Important in wage and price determination.

  7. Snake Oil • Capitalism does not: • Just produce what people want: (as long as firms make profits).

  8. Snake Oil (continued) • Capitalism produces what people think they want: (as long as firms make profits).

  9. Money Illusion • Important determinant of working of the economy.

  10. Stories • Business cycles and stories. • Dot.com Bubble.

  11. Summary • Confidence. • Fairness. • Snake Oil. • Money Illusion. • Stories.

  12. Why Do Economies Fall into Recessions? • Cycles in psychology. • Current crisis: • Confidence, Snake Oil, and Stories.

  13. What are the powers of central banks? • Limitations of open market operations. • Discount window.

  14. Four Lines of Defense: • Regulation. • Rediscounting. • Deposit Guarantees. • Bankruptcy Management . • Shadow Banking: • No lines of Defense.

  15. Current Crisis • Credit crunch. • Humpty Dumpty. • Target for full employment level of demand. • Target for full employment level of credit.

  16. Meeting the Credit Target • Fed Lending Facilities. • Direct capitalization of banks. • Direct granting of credit by SGE’s.

  17. Why Do We Need Such Targets? • Needed for planning. • Cost of lower unemployment: • From Bailout. • From Fiscal Stimulus.

  18. Playpen Problem: • Need for Financial Regulation.

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