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Self-Fulfilling Expectations and Fluctuations in Aggregate Demand

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Michael Woodford

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Abstract

The paper presents an intertemporal general equilibrium model with rationing in the product market, in which stationary sunspot equilibria are shown to exist, indicating the possibility of fluctuations in economic activity simply due to self-fulfilling variations in econornic agents' expectations. Specifically, revised expectations about future aggregate demand change current investment demand, which (amplified by a "multiplier" process) then affects current aggregate demand. Parameter values required for endogenous fluctuations are discussed, as well as quantitative properties of the fluctuations predicted. Countercyclical stabilization policies are shown to rule out such equilibria.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3361.

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Date of creation: May 1990
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Handle: RePEc:nbr:nberwo:3361

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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.:
  1. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," NBER Working Papers 2115, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1986-2), pages 285-338. [Downloadable!]
  3. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168. [Downloadable!] (restricted)
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  4. Julio J. Rotemberg & Michael Woodford, 1989. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," NBER Working Papers 3206, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc. [Downloadable!]
  6. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-90, December. [Downloadable!] (restricted)
  7. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April. [Downloadable!] (restricted)
  8. Shapiro, Matthew D, 1987. "Are Cyclical Fluctuations in Productivity Due More to Supply Shocks or Demand Shocks?," American Economic Review, American Economic Association, vol. 77(2), pages 118-24, May. [Downloadable!] (restricted)
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  9. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December. [Downloadable!] (restricted)
  10. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  11. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September. [Downloadable!] (restricted)
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  12. Olivier J. Blanchard, 1987. "Why Does Money Affect Output? A Survey," Working papers 453, Massachusetts Institute of Technology (MIT), Department of Economics.
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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. Luis Aguiar-Conraria & Yi Wen, 2005. "Foreign trade and equilibrium indeterminacy," Working Papers 2005-041, Federal Reserve Bank of St. Louis. [Downloadable!]
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  2. Bill Dupor, 2005. "Keynesian Conundrum: Multiplicity and Time Consistent Stabilization," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 154-177, January. [Downloadable!] (restricted)
  3. Steven M. Fazzari & Piero Ferri & Edward Greenberg, 1999. "Aggregate Demand and Micro Behavior: A New Perspective on Keynesian Macroeconomics," Macroeconomics 9902005, EconWPA. [Downloadable!]
  4. Pengfei Wang & Yi Wen, 2006. "Imperfect competition and sunspots," Working Papers 2006-015, Federal Reserve Bank of St. Louis. [Downloadable!]
  5. Jahangir Aziz & Luc Leruth, 1999. "Cyclical Effects of the Composition of Government Purchases," Macroeconomics 9902007, EconWPA. [Downloadable!]
  6. Bill Dupor, 1999. "Keynesian conundrum: multiplicity and time consistent stabilization," Discussion Paper / Institute for Empirical Macroeconomics 131, Federal Reserve Bank of Minneapolis. [Downloadable!]
  7. Luís Aguiar-Conraria & Yi Wen, 2007. "A note on oil dependence and economic instability," Working Papers 2006-060, Federal Reserve Bank of St. Louis. [Downloadable!]
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  8. Harrison, Sharon G & Weder, Mark, 2002. "Did Sunspot Forces Cause the Great Depression?," CEPR Discussion Papers 3267, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Jordi Gali, 1995. "Non-Walrasian Unemployment Fluctuations," NBER Working Papers 5337, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Pengfei Wang & Yi Wen, 2007. "Imperfect competition and indeterminacy of aggregate output," Working Papers 2006-017, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  11. Gordon Menzies & Daniel John Zizzo, 2005. "Inferential Expectations," Research Paper Series 159, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
    Other versions:
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