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Self-Fulfilling Expectations and Fluctuations in Aggregate Demand

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  • Michael Woodford

Abstract

The paper presents an intertemporal general equilibrium model with rationing in the product market, in which stationary sunspot equilibria are shown to exist, indicating the possibility of fluctuations in economic activity simply due to self-fulfilling variations in economic agents' expectations. Specifically, revised expectations about future aggregate demand change current investment demand, which (amplified by a multiplier" process) then affects current aggregate demand. Parameter values required for endogenous fluctuations are discussed, as well as quantitative properties of the fluctuations predicted. Countercyclical stabilization policies are shown to rule out such equilibria.

Suggested Citation

  • Michael Woodford, 1990. "Self-Fulfilling Expectations and Fluctuations in Aggregate Demand," NBER Working Papers 3361, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3361
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    References listed on IDEAS

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    Cited by:

    1. Menzies Gordon Douglas & Zizzo Daniel John, 2009. "Inferential Expectations," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-27, December.
    2. Bill Dupor, 2005. "Keynesian Conundrum: Multiplicity and Time Consistent Stabilization," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 154-177, January.
    3. Jahangir Aziz & Luc Leruth, 1999. "Cyclical Effects of the Composition of Government Purchases," Macroeconomics 9902007, University Library of Munich, Germany.
    4. Perli, Roberto, 1998. "Indeterminacy, home production, and the business cycle: A calibrated analysis," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 105-125, February.
    5. Aguiar-Conraria, Luís & Wen, Yi, 2008. "A Note On Oil Dependence And Economic Instability," Macroeconomic Dynamics, Cambridge University Press, vol. 12(5), pages 717-723, November.
    6. Luís Francisco Aguiar-Conraria & Yi Wen, 2004. "Foreign Trade and Equilibrium Indeterminacy," NIPE Working Papers 5/2004, NIPE - Universidade do Minho.
    7. Wang, Pengfei & Wen, Yi, 2008. "Imperfect competition and indeterminacy of aggregate output," Journal of Economic Theory, Elsevier, vol. 143(1), pages 519-540, November.
    8. Dieppe, Alistair & Pandiella, Alberto González & Hall, Stephen & Willman, Alpo, 2013. "Limited information minimal state variable learning in a medium-scale multi-country model," Economic Modelling, Elsevier, vol. 33(C), pages 808-825.
    9. Pengfei Wang & Yi Wen, 2006. "Imperfect competition and sunspots," Working Papers 2006-015, Federal Reserve Bank of St. Louis.
    10. Steven M. Fazzari & Piero Ferri & Edward Greenberg, 1999. "Aggregate Demand and Micro Behavior: A New Perspective on Keynesian Macroeconomics," Macroeconomics 9902005, University Library of Munich, Germany.
    11. Michael Assous & Pedro Garcia Duarte, 2017. "Challenging Lucas: from overlapping generations to infinite-lived agent models," Working Papers, Department of Economics 2017_03, University of São Paulo (FEA-USP).
    12. Harrison, Sharon G. & Weder, Mark, 2006. "Did sunspot forces cause the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1327-1339, October.
    13. Jordi Gali, 1995. "Non-Walrasian Unemployment Fluctuations," NBER Working Papers 5337, National Bureau of Economic Research, Inc.

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