The Expectational Stability of Underemployment Equilibria

Bartholomew J Moore

Economic Inquiry, 1995, vol. 33, issue 2, 319-35

Abstract: External economies of scale can generate multiple equilibria in perfect-foresight models. With multiple equilibria comes the problem of indeterminacy: At which equilibrium will the economy arrive? Another implication of these models is that 'animal spirits' may drive the economy between equilibria, say from a low-employment to a high-employment equilibrium and back. The author shows a learning algorithm can be used to eliminate the indeterminacy of these models. Socially inferior low-employment steady states are ruled out. Stable low-employment steady states may exist but are not unambiguously inferior because of the presence of both positive and negative externalities. Copyright 1995 by Oxford University Press.

Date: 1995
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