Tobin (1975) meets rational expectations

Emiliano Libman
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Emiliano Libman: Business School and CIMaD, University of San Martín, Buenos Aires, Argentina

Review of Keynesian Economics, 2020, vol. 8, issue 1, 102-118

Abstract: In his 1975 paper, Tobin formalizes one of the main lessons from Keynes's General Theory: the idea that price flexibility is destabilizing. We propose a modified model à la Tobin by including rational expectations and staggered price setting, to show that under some conditions (a strong Tobin effect), there exist an infinite number of equilibrium paths that converge to equilibrium. Tobin was right: the most problematic assumption of modern macroeconomics is not rational expectations per se, but rather price flexibility and continuous market clearing.

Keywords: price flexibility; Tobin; rational expectations; New Consensus model (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2020
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