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Toward a Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria

  • Neary, J Peter
  • Stiglitz, Joseph E

A two-period model of temporary equilibrium with rationing is presented, paying particular attention to agents' expectations of future constraints. it is shown that with arbitrary constraint expectations many different types of current equilibria may be consistent with the same set of (current and expected future) wages and prices, and that constraint expectations tend to be self-fulfilling (e.g., a higher expectation of Keynesian unemployment tomorrow increases the probability that it will prevail today). In addition, rational constraint expectations (i.e., perfect foresight of future constraint levels) are shown to enhance rather than reduce the effectiveness of government policy.

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Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 98 (1983)
Issue (Month): 3 (Supplement)
Pages: 199-228

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Handle: RePEc:tpr:qjecon:v:98:y:1983:i:3:p:199-228
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  1. 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.
  2. repec:cup:cbooks:9780521068659 is not listed on IDEAS
  3. Bohm, Volker, 1978. "Disequilibrium dynamics in a simple macroeconomic model," Journal of Economic Theory, Elsevier, vol. 17(2), pages 179-199, April.
  4. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
  5. Grandmont, Jean-Michel, 1977. "Temporary General Equilibrium Theory," Econometrica, Econometric Society, vol. 45(3), pages 535-72, April.
  6. Dixit, Avinash, 1978. "The Balance of Trade in a Model of Temporary Equilibrium with Rationing," Review of Economic Studies, Wiley Blackwell, vol. 45(3), pages 393-404, October.
  7. Muellbauer, John & Portes, Richard, 1978. "Macroeconomic Models with Quantity Rationing," Economic Journal, Royal Economic Society, vol. 88(352), pages 788-821, December.
  8. Blad, M.C. & Kirman, A.P., 1978. "The Long Run Evolution of a Rationed Equilibrium Model," The Warwick Economics Research Paper Series (TWERPS) 128, University of Warwick, Department of Economics.
  9. Dixit, Avinash, 1976. "Public finance in a Keynesian temporary equilibrium," Journal of Economic Theory, Elsevier, vol. 12(2), pages 242-258, April.
  10. Benassy, Jean-Pascal, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Wiley Blackwell, vol. 42(4), pages 503-23, October.
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