Animal Spirits, Persistent Unemployment and the Belief Function

This paper presents a theory of the monetary transmission mechanism in a monetary version of Farmer's (2009) model in which there are multiple equilibrium unemployment rates.The model has two equations in common with the new-Keynesian model; the optimizing IS curve and the policy rule.It differs from the new-Keynesian model by replacing the Phillips curve with a belief function to determine expectations of nominal income growth.I estimate both models using U.S. data and I show that the Farmer monetary model fits the data better than its new-Keynesian competitor.