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Bounded rationality and the ineffectiveness of big push policies

Author

Listed:
  • Xiao Wei

    () (Department of Economics, State University of New York at Binghamton, Binghamton, NY 13902, USA)

  • Xu Junyi

    (Department of Economics and Finance, Murray State University, Murray, KY 42071, USA)

Abstract

If a poverty trap exists, can a big-push policy lift the economy out of it? This paper applies Sargent’s [Sargent, Thomas J. 1993. Bounded Rationality in Macroeconomics. New York: Oxford University Press] bounded rationality approach to study the post-policy transition of an economy from a low-income equilibrium to a high-income equilibrium. The effectiveness of the policy diminishes if individuals are adaptive learners who cannot make optimal decisions instantaneously. This paper contributes to the renewed discussion on the effectiveness of massive aid policies for developing countries from a theoretical perspective.

Suggested Citation

  • Xiao Wei & Xu Junyi, 2019. "Bounded rationality and the ineffectiveness of big push policies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(2), pages 1-21, June.
  • Handle: RePEc:bpj:bejmac:v:19:y:2019:i:2:p:21:n:4
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    More about this item

    Keywords

    big push policy; bounded rationality; learning; massive aid policies; poverty trap;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models

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