Self-Fulfilling Expectations and Fluctuations in Aggregate Demand
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.
|Date of creation:||May 1990|
|Date of revision:|
|Publication status:||published as N.G. Mankiw and D. Romer, eds., New Keynesian Economics, Vol. 2, pp.77-110, Cambridge: MIT Press, 1991.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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