Rational Expectations in a Standard Keynesian Model

Jun Young Kim
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Jun Young Kim: Sungkyunkwan University

Korean Economic Review, 1990, vol. 6, issue 2, 31-39

Abstract: In the supply side analysis based on the Lucas' supply function, most remarkable result of rational expectations is expected monetary policy is neutral to real economy. Our analytic point is completely different from the previous one in the sense that rational expectations are introduced into demand side analysis reflecting a standard Keynesian model. According to the results in the demand side model expected monetary policy under rational expectations is not neutral to real output, while the neutrality of monetary policy under the Lucas' supply function could hold only in a limited case. Further, the effect of monetary policy is in general dependent on the elasticity of the demand for money. Hence, in this work we reconstruct rational expectations into a standard Keynesian model and the principle of effective demand.

Date: 1990
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