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

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  • Bomfim, Antulio N
  • Diebold, Francis X

Abstract

Motivated by recent developments in the bounded rationality and strategic complementarity literatures, the authors examine an intentionally simple and stylized aggregative economic model, when the assumptions of fully rational expectations and no strategic interactions are relaxed. They 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. Copyright 1997 by Royal Economic Society.

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  • Bomfim, Antulio N & Diebold, Francis X, 1997. "Bonded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers," Economic Journal, Royal Economic Society, vol. 107(444), pages 1358-1374, September.
  • Handle: RePEc:ecj:econjl:v:107:y:1997:i:444:p:1358-74
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    Cited by:

    1. François R. Velde, 2009. "Chronicle of a Deflation Unforetold," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 591-634, August.
    2. Tobias Rötheli, 2005. "Applied Welfare Economics with Bounded Rationality: Public Policies Toward Remote Sensing," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(1), pages 39-47, February.
    3. Weder, Mark, 2004. "Near-rational expectations in animal spirits models of aggregate fluctuations," Economic Modelling, Elsevier, vol. 21(2), pages 249-265, March.
    4. Anderlini, Luca & Canning, David, 2001. "Structural Stability Implies Robustness to Bounded Rationality," Journal of Economic Theory, Elsevier, vol. 101(2), pages 395-422, December.
    5. Thijssen, J.J.J., 2003. "Investment under uncertainty, market evolution and coalition spillovers in a game theoretic perspective," Other publications TiSEM 672073a6-492e-4621-8d4a-0, Tilburg University, School of Economics and Management.
    6. Di Bartolomeo, Giovanni & Beqiraj, Elton & Di Pietro, Marco, 2017. "Beliefs formation and the puzzle of forward guidance power," EconStor Preprints 175198, ZBW - German National Library of Economics.
    7. 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.
    8. 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.

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    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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