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Toward a Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria

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  • Neary, J Peter
  • Stiglitz, Joseph E

Abstract

A two-period model of temporary equilibrium with rationing is presented, paying particular attention to agents' expectations of future constraints. it is shown that with arbitrary constraint expectations many different types of current equilibria may be consistent with the same set of (current and expected future) wages and prices, and that constraint expectations tend to be self-fulfilling (e.g., a higher expectation of Keynesian unemployment tomorrow increases the probability that it will prevail today). In addition, rational constraint expectations (i.e., perfect foresight of future constraint levels) are shown to enhance rather than reduce the effectiveness of government policy.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 98 (1983)
Issue (Month): 3 (Supplement)
Pages: 199-228

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Handle: RePEc:tpr:qjecon:v:98:y:1983:i:3:p:199-228

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References

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  1. Dixit, Avinash, 1978. "The Balance of Trade in a Model of Temporary Equilibrium with Rationing," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 393-404, October.
  2. Blad, M.C. & Kirman, A.P., 1978. "The Long Run Evolution of a Rationed Equilibrium Model," The Warwick Economics Research Paper Series (TWERPS) 128, University of Warwick, Department of Economics.
  3. Muellbauer, John & Portes, Richard, 1978. "Macroeconomic Models with Quantity Rationing," Economic Journal, Royal Economic Society, vol. 88(352), pages 788-821, December.
  4. Barro,Robert J. & Grossman,Herschel I., 2008. "Money Employment and Inflation," Cambridge Books, Cambridge University Press, number 9780521068659, April.
  5. Bohm, Volker, 1978. "Disequilibrium dynamics in a simple macroeconomic model," Journal of Economic Theory, Elsevier, vol. 17(2), pages 179-199, April.
  6. Benassy Jean-pascal, 1974. "Neokeynesian disequilibrium theory in a monetary economy," CEPREMAP Working Papers (Couverture Orange) 7402, CEPREMAP.
  7. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
  8. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  9. Grandmont, Jean-Michel, 1977. "Temporary General Equilibrium Theory," Econometrica, Econometric Society, vol. 45(3), pages 535-72, April.
  10. Dixit, Avinash, 1976. "Public finance in a Keynesian temporary equilibrium," Journal of Economic Theory, Elsevier, vol. 12(2), pages 242-258, April.
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Cited by:
  1. Driffill, John & Miller, Marcus, 2011. "Liquidity When It Matters Most: QE and Tobin’s q," CEPR Discussion Papers 8511, C.E.P.R. Discussion Papers.
  2. Alla Kirova, 2010. "Estimation of the specific features of the New Keynesian Doctrine, compared to other schools in modern macroeconomics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 28-45.
  3. Ohlsson, Henry, 1987. " Cost-Benefit Rules in a Regionalized Disequilibrium Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 89(2), pages 165-82.
  4. Otero, Jesus G., 2000. "Coffee, economic fluctuations and stabilisation: an intertemporal disequilibrium model with capital market imperfections," Journal of Development Economics, Elsevier, vol. 62(1), pages 105-129, June.
  5. Shari Spiegel, 2007. "Macroeconomics and Growth Policies," Policy Notes 1, United Nations, Department of Economics and Social Affairs.

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