Coordination Problems with Fixed and Flexible Wages: The Role of the Keynesian Multiplier
The paper considers a simple "three goods" model in which firms simultaneously decide hiring workers. The production is sold later at a market clearing price; the buyers'purchasing power depend on their income, that itself depends on the firms'previous decisions. The rational expectations equilibrium is Keynesian whenever the wage is fixed and Walrasian when it is flexible. We examine whether the equilibrium can be Common Knowledge when the model is. In all cases, the keynesian multiplier plays a key role in the mental coordination process under consideration. This role may even be more important in the fully flexible case.
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