Do heterogeneous expectations constitute a challenge for policy interaction?
AbstractYes, indeed; at least when it comes to fiscal and monetary policy interaction. We examine a Neo-Classical economy, where agents have either rational or adaptive expectations. We demonstrate that the monetarist solution can be unique and stationary under a passive fiscal/active monetary policy regime, because active monetary policy incorporates expectational heterogeneity. In contrast, under an active fiscal/passive monetary policy regime, the fiscalist solution is prone to explosive dynamics d e to empirically plausible expectational heterogeneity. However, conditional on stationarity, both regimes can yield promising business cycle dynamics, which are absent in the homogeneous expectations benchmark.
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Bibliographic InfoPaper provided by ISCTE-IUL, Business Research Unit (BRU-IUL) in its series Working Papers Series 2 with number 13-02.
Date of creation: 18 Mar 2013
Date of revision:
Inflation; Heterogeneous Expectations; Fiscal and Monetary Policy;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-03-23 (All new papers)
- NEP-CBA-2013-03-23 (Central Banking)
- NEP-MAC-2013-03-23 (Macroeconomics)
- NEP-MON-2013-03-23 (Monetary Economics)
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