Expectations Traps and Coordination Failures with Discretionary Policymaking

Richard Dennis and Tatiana Kirsanova

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple equilibria it is first necessary to understand how an economy arrives to a particular equilibrium. In this paper we employ notions of learnability and self-enforceability to motivate and identify equilibria of particular interest. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our methods for identifying equilibria of interest. Importantly, unless the Pareto-preferred equilibrium is learnable by private agents, we find little reason to expect coordination on that equilibrium.

Keywords: Discretionary policymaking; multiple equilibria; coordination; equilibrium selection (search for similar items in EconPapers)
JEL-codes: C62 C73 E52 E61 (search for similar items in EconPapers)
Pages: 33 Pages
Date: 2013-05
New Economics Papers: this item is included in nep-cdm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Expectations Traps and Coordination Failures with Discretionary Policymaking (2013)
Working Paper: Expectations Traps and Coordination Failures with Discretionary Policymaking (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2013-611

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