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Do heterogeneous expectations constitute a challenge for policy interaction?

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  • Emanuel Gasteiger

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Abstract

Yes, 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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File URL: http://bru-unide.iscte.pt/RePEc/pdfs/13-02.pdf
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Bibliographic Info

Paper provided by ISCTE-IUL, Business Research Unit (BRU-IUL) in its series Working Papers Series 2 with number 13-02.

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Date of creation: 18 Mar 2013
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Handle: RePEc:isc:iscwp2:bruwp1302

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Keywords: Inflation; Heterogeneous Expectations; Fiscal and Monetary Policy;

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