DO HETEROGENEOUS EXPECTATIONS CONSTITUTE A CHALLENGE FOR POLICY INTERACTION?

Emanuel Gasteiger

Macroeconomic Dynamics, 2018, vol. 22, issue 8, 2107-2140

Abstract: Yes, indeed; at least for macroeconomic policy interaction. We examine a Neo-Classical economy and provide the conditions for policy arrangements to successfully stabilize the economy when agents have either rational or adaptive expectations. For a contemporaneous-data monetary policy rule, the monetarist solution is unique and stationary under a passive fiscal/active monetary policy regime if monetary policy appropriately incorporates expectational heterogeneity. In contrast, the active fiscal/passive monetary policy regime's fiscalist solution is prone to explosiveness due to empirically plausible expectational heterogeneity. Nevertheless, this can be a well-defined, rather orthodox equilibrium. For operational monetary policy rules, only the results for the fiscalist solution prevail. Moreover, our results are plausible from an adaptive learning viewpoint.

Date: 2018
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Related works:
Working Paper: Do heterogeneous expectations constitute a challenge for policy interaction? (2016)
Working Paper: Do heterogeneous expectations constitute a challenge for policy interaction? (2015)
Working Paper: Do heterogeneous expectations constitute a challenge for policy interaction? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:22:y:2018:i:08:p:2107-2140_00

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