Advanced Search
MyIDEAS: Login

Bounded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers

Contents:

Author Info

  • Antulio N. Bomfim
  • Francis X. Diebold

Abstract

Motivated by recent developments in the bounded rationality and strategic complementarity literatures, we examine an intentionally simple and stylized aggregative economic model, when the assumptions of fully rational expectations and no strategic interactions are relaxed. We show that small deviations from rational expectations, taken alone, lead only to small deviations from classical policy- ineffectiveness, but that the situation can change dramatically when strategic complementarity is introduced. Strategic complementarity magnifies the effects of even small departures from rational expectations, producing equilibria with policy effectiveness, output persistence and multiplier effects.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w5482.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5482.

as in new window
Length:
Date of creation: Mar 1996
Date of revision:
Handle: RePEc:nbr:nberwo:5482

Note: EFG
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Oh, S. & Waldman, M., 1990. "The Macroeconomic Effects Of False Announcements," Papers 17, California Los Angeles - Applied Econometrics.
  2. John Haltiwanger & Michael Waldman, 1983. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," UCLA Economics Working Papers 303, UCLA Department of Economics.
  3. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  4. Oh, Seonghwan & Waldman, Michael, 1994. "Strategic Complementarity Slows Macroeconomic Adjustment to Temporary Shocks," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 318-29, April.
  5. Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  7. Haltiwanger, John C & Waldman, Michael, 1989. "Limited Rationality and Strategic Complements: The Implications for Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 463-83, August.
  8. Laurence Ball & David Romer, 1990. "Real Rigidities and the Non-Neutrality of Money," NBER Working Papers 2476, National Bureau of Economic Research, Inc.
  9. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September.
  10. Chatterjee, Satyajit & Cooper, Russell & Ravikumar, B, 1993. "Strategic Complementarity in Business Formation: Aggregate Fluctuations and Sunspot Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 795-811, October.
  11. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-24, March.
  13. Pagano, Marco, 1989. "Imperfect Competition, Underemployment Equilibria and Fiscal Policy," CEPR Discussion Papers 280, C.E.P.R. Discussion Papers.
  14. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
  15. Haltiwanger, John & Waldman, Michael, 1991. "Responders versus Non-responders: A New Perspective on Heterogeneity," Economic Journal, Royal Economic Society, vol. 101(408), pages 1085-1102, September.
  16. Sethi, Rajiv & Franke, Reiner, 1995. "Behavioural Heterogeneity under Evolutionary Pressure: Macroeconomic Implications of Costly Optimisation," Economic Journal, Royal Economic Society, vol. 105(430), pages 583-600, May.
  17. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  18. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
  19. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
  20. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December.
  21. Russell Cooper & John Haltiwanger, 1993. "Evidence on Macroeconomic Complementarities," NBER Working Papers 4577, National Bureau of Economic Research, Inc.
  22. King, R.G. & Baxter, M., 1990. "Productive Externalities And Cyclical Volatility," RCER Working Papers 245, University of Rochester - Center for Economic Research (RCER).
  23. 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.
  24. Hart, Oliver, 1982. "A Model of Imperfect Competition with Keynesian Features," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 109-38, February.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Weder, Mark, 2004. "Near-rational expectations in animal spirits models of aggregate fluctuations," Economic Modelling, Elsevier, vol. 21(2), pages 249-265, March.
  2. Anderlini, Luca & Canning, David, 2001. "Structural Stability Implies Robustness to Bounded Rationality," Journal of Economic Theory, Elsevier, vol. 101(2), pages 395-422, December.
  3. SOOREEA, Rajeev, 2007. "Are Taylor-Based Monetary Policy Rules Forward-Looking?. An Investigation Using Superexogeneity Tests," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(2), pages 87-94.
  4. Anderlini, Luca & Canning, David, 2000. "Structural stability and robustness to bounded rationality," Discussion Paper Series In Economics And Econometrics 0002, Economics Division, School of Social Sciences, University of Southampton.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:5482

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.