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Macro Dynamics in a Model with Uncertainty

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  • Piero Ferri

    ()

  • Anna Maria Variato

    ()

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    Abstract

    Limits on information have deep economic impact and affect the conduct of economic policy. In the present paper we explore the effect of substantive uncertainty. A macro model is then derived in order to make this condition work at micro economic level too: the investment function implies an interaction between real and financial aspects; the labor market is ruled by imperfect competition; agents are boundedly rational and make their forecasts according to a Markov regime switching rule; and finally monetary authorities learns about the NAIRU. As a result we obtain a model which is mostly keynesian in nature, whose implications can nevertheless be compared with the new neoclassical synthesis models. Simulations are carried out and show the possible appearence of endogenous fluctuations, persistence of oscillations, and the emergence of a trade-off between the control of inflation and the cyclicality of the economy.

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    Bibliographic Info

    Paper provided by University of Bergamo, Department of Economics in its series Working Papers with number 0704.

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    Length: 32 pages
    Date of creation: Jul 2007
    Date of revision:
    Handle: RePEc:brg:wpaper:0704

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    Keywords: endogenous cycles; monetary policy; uncertainty; bounded rationality; learning;

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    Cited by:
    1. Piero Ferri & Anna Variato, 2010. "Uncertainty and Learning in Stochastic Macro Models," International Advances in Economic Research, Springer, vol. 16(3), pages 297-310, August.

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