Confidence, Crashes and Animal Spirits *

This article reformulates two important ideas from Keynes’s General Theory. The first is that there may be a continuum of steady‐state unemployment rates. The second is that beliefs select an equilibrium. I argue that search and matching costs in the labour market lead to the existence of a continuum of equilibria and I resolve the resulting indeterminacy by assuming that the beliefs of stock market participants are self‐fulfilling. The article reconciles Keynesian economics with general equilibrium theory without invoking the assumption of frictions that prevent wages and prices from reaching their equilibrium levels.