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

  • Bomfim, Antulio N
  • Diebold, Francis X

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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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 107 (1997)
Issue (Month): 444 (September)
Pages: 1358-74

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Handle: RePEc:ecj:econjl:v:107:y:1997:i:444:p:1358-74
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