Bounded rationality and the ineffectiveness of big push policies

Wei Xiao and Junyi Xu ()

The B.E. Journal of Macroeconomics, 2019, vol. 19, issue 2, 21

Abstract: If a poverty trap exists, can a big-push policy lift the economy out of it? This paper applies Sargent’s [Sargent, Thomas J. 1993. Bounded Rationality in Macroeconomics. New York: Oxford University Press] bounded rationality approach to study the post-policy transition of an economy from a low-income equilibrium to a high-income equilibrium. The effectiveness of the policy diminishes if individuals are adaptive learners who cannot make optimal decisions instantaneously. This paper contributes to the renewed discussion on the effectiveness of massive aid policies for developing countries from a theoretical perspective.

Keywords: big push policy; bounded rationality; learning; massive aid policies; poverty trap (search for similar items in EconPapers)
JEL-codes: D83 E1 O11 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/bejm-2017-0182

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