On the Efficiency-Effects of Private (Dis-)Trust in the Government
We consider a continuous-time version of Ireland's Neo-Keynesian reinterpretation of the seminal Kydland-Prescott model, assuming now an heterogenous private sector. In each period, a fraction of the private agents naively believes the policy announcements made by the government. The other agents, who know the current number of non-believers in the economy, are utility-maximizers. The fraction of agents who believe the government changes over time according to a Word of Mouth learning process, that depends upon the difference between the payoffs they obtain and the payoffs realized by the non-believers. The government minimizes its cumulated loss through its choice of policy announcement and realized policy. We show that the economy can have two stable equilibria. At one of these, all agents act rationally. At the other equilibrium, which is associated with a higher average utility of the private sector, a positive percentage of the agents trusts the government. The two equilibria are separated by a Skiba point associated with an unstable spiral of the canonical system. Thus, the initial fraction of believers in the economy can have drastic consequences for the economic policy followed and the losses experienced by the different agents. Moreover, the flexibility of the private sector in reacting to the losses' difference proves to be crucial. Independently of the number of believers in the economy, the government losses monotonically increase with the flexibility. The private sector, on the other hand, is best off for an intermediate level of flexibility.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Web page: http://zai.ini.unizh.ch/complexity2003/|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter N. Ireland, 1999.
"Expectations, Credibility, and Time-Consistent Monetary Policy,"
Boston College Working Papers in Economics
425, Boston College Department of Economics.
- Ireland, Peter N., 2000. "Expectations, Credibility, And Time-Consistent Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 4(04), pages 448-466, December.
- Peter N. Ireland, 1999. "Expectations, Credibility, and Time-Consistent Monetary Policy," NBER Working Papers 7234, National Bureau of Economic Research, Inc.
- Peter N. Ireland, 1998. "Expectations, credibility, and time-consistent monetary policy," Working Paper 9812, Federal Reserve Bank of Cleveland.
- Grune, Lars & Semmler, Willi, 2004. "Using dynamic programming with adaptive grid scheme for optimal control problems in economics," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2427-2456, December.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Ireland, Peter N., 1997. "Sustainable monetary policies," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 87-108, November.
- Michel, Philippe, 1982.
"On the Transversality Condition in Infinite Horizon Optimal Problems,"
Econometric Society, vol. 50(4), pages 975-85, July.
- Michel, P., 1980. "On the Transversality Condition in Infinite Horizon Optimal Problems," Cahiers de recherche 8024, Universite de Montreal, Departement de sciences economiques.
- Thomas Vallee & Christophe Deissenberg & Tamer Basar, . "Optimal Open Loop Cheating in Dynamic Reversed LQG Stackelberg Games," Computing in Economics and Finance 1997 125, Society for Computational Economics.
- Cho, In-Koo & Matsui, Akihiko, 1995. "Induction and the Ramsey policy," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1113-1140.
When requesting a correction, please mention this item's handle: RePEc:sce:cplx03:25. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.