Expectations Traps and Coordination Failures:Selecting Among Multiple Discretionary Equilibria

Richard Dennis and Tatiana Kirsanova

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Discretionary policymakers cannot manage private-sector expectations and cannot co-ordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. In order to utilize the explanatory power of models with multiple equilibria it is necessary to understand how an economy arrives to a particular equilibrium. In this paper, we employ notions of robustness, learnability, and the potential for policy errors to motivate and develop a suite of equilibrium selection criteria. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our equilibrium selection methods. Importantly, although the Pareto-preferred equilibrium is invariably an equilibrium identified by standard numerical iterative solution methods, unless it is learnable by private agents, we find little reason to expect coordination on that equilibrium.

JEL-codes: C62 C73 E52 E61 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Expectations traps and coordination failures: selecting among multiple discretionary equilibria (2010)
Working Paper: Expectations Traps and Coordination Failures: Selecting among Multiple Discretionary Equilibria (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2010-02

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