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Bonded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers

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Author Info
Bomfim, Antulio N
Diebold, Francis X

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Abstract

Motivated by recent developments in the bounded rationality and strategic complementarity literatures, the authors examine an intentionally simple and stylized aggregative economic model, when the assumptions of fully rational expectations and no strategic interactions are relaxed. They show that small deviations from rational expectations, taken alone, lead only to small deviations from classical policy-ineffectiveness, but that the situation can change dramatically when strategic complementarity is introduced. Strategic complementarity magnifies the effects of even small departures from rational expectations, producing equilibria with policy effectiveness, output persistence, and multiplier effects. Copyright 1997 by Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 107 (1997)
Issue (Month): 444 (September)
Pages: 1358-74
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Handle: RePEc:ecj:econjl:v:107:y:1997:i:444:p:1358-74

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Russell Cooper & John Haltiwanger, 1993. "Evidence on Macroeconomic Complementarities," NBER Working Papers 4577, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Satyajit Chatterjee & Russell W. Cooper & B. Ravikumar, 1993. "Strategic complementarity in business formation: aggregate fluctuations and sunspot equilibria," Working Papers 93-9, Federal Reserve Bank of Philadelphia.
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  4. King, R.G. & Baxter, M., 1990. "Productive Externalities And Cyclical Volatility," RCER Working Papers 245, University of Rochester - Center for Economic Research (RCER).
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  10. Oh, Seonghwan & Waldman, Michael, 1994. "Strategic Complementarity Slows Macroeconomic Adjustment to Temporary Shocks," Economic Inquiry, Oxford University Press, vol. 32(2), pages 318-29, April.
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  24. Haltiwanger, John & Waldman, Michael, 1991. "Responders versus Non-responders: A New Perspective on Heterogeneity," Economic Journal, Royal Economic Society, vol. 101(408), pages 1085-1102, September. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. SOOREEA, Rajeev, 2007. "Are Taylor-Based Monetary Policy Rules Forward-Looking?. An Investigation Using Superexogeneity Tests," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(2), pages 87-94. [Downloadable!] (restricted)
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