Multiple equilibria and rules of thumb

Ellis, Christopher J. (1998) Multiple equilibria and rules of thumb. Journal of Macroeconomics, 20 (1). pp. 27-54. ISSN 0164-0704. (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided)

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We introduce a production externality and endogenize expectations in two "Keynesian" models. One has an information asymmetry, aggregate price level, the other, nominal wage contracts. Each model displays two rational expectations equilibria. Nominal shocks generate a business cycle moving the economy between paths convergent to one equilibrium or the other. The dynamics correspond well to the (business cycle) stylized facts. Expectations are either backward or forward looking as chosen by economic agents. The more aggressive is government policy when expectations are backward looking, the greater the probability that the expectations formation mechanism is forward looking in the future. There is a trade-off between the effects of policy today and its expected future effects.

Item Type: Article
Subjects: H Social Sciences
Divisions: Faculties > Social Sciences > School of Economics
Depositing User: R.F. Xu
Date Deposited: 26 Jun 2009 11:17
Last Modified: 26 Jun 2009 11:17
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