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Bounded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers

  • Bomfim
  • Diebold

Motivated by recent developments in the bounded rationality and strategic complementarity literatures, we examine an intentionally simple and stylized aggregative economic model when the assumptions of fully rational expectations and no strategic interactions are relaxed. We show that small deviations from rational expectations, taken alone, lead only to small deviations from classical policy-ineffectiveness, but that the situation can change dramatically when strategic complementarity is introduced. Strategic complementarity magnifies the effects of even small departures from rational expectations, producing equilibria with policy effectiveness, output persistence, and multiplier effects.

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Paper provided by University of Pennsylvania in its series Home Pages with number 5482.

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Handle: RePEc:wop:pennhp:_057
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  17. Oh, S. & Waldman, M., 1990. "The Macroeconomic Effects Of False Announcements," Papers 17, California Los Angeles - Applied Econometrics.
  18. Russell Cooper & John Haltiwanger, 1993. "Evidence on Macroeconomic Complementarities," NBER Working Papers 4577, National Bureau of Economic Research, Inc.
  19. Oh, Seonghwan & Waldman, Michael, 1994. "Strategic Complementarity Slows Macroeconomic Adjustment to Temporary Shocks," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 318-29, April.
  20. Pagano, Marco, 1989. "Imperfect Competition, Underemployment Equilibria and Fiscal Policy," CEPR Discussion Papers 280, C.E.P.R. Discussion Papers.
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