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Expectations Traps and Coordination Failures: Selecting among Multiple Discretionary Equilibria

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  • Dennis, Richard
  • Kirsanova, Tatiana

Abstract

Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple equilibria it is �first necessary to understand how an economy arrives to a particular equilibrium. In this paper, we employ notions of learnability, self-enforceability, and properness to motivate and develop a suite of equilibrium selection criteria. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our equilibrium selection methods. Importantly, unless the Pareto-preferred equilibrium is learnable by private agents, we �find little reason to expect coordination on that equilibrium.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24616.

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Date of creation: 25 Aug 2010
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Handle: RePEc:pra:mprapa:24616

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Keywords: Discretionary policymaking; multiple equilibria; coordination; equilibrium selection;

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Cited by:
  1. Himmels, Christoph & Kirsanova, Tatiana, 2011. "Expectations Traps and Monetary Policy with Limited Commitment," MPRA Paper 29208, University Library of Munich, Germany.
  2. Himmels, Christoph & Kirsanova, Tatiana, 2013. "Escaping expectation traps: How much commitment is required?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 649-665.
  3. Davide Debortoli & Junior Maih & Ricardo Nunes, 2011. "Loose commitment in medium-scale macroeconomic models: theory and applications," International Finance Discussion Papers 1034, Board of Governors of the Federal Reserve System (U.S.).

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