Bounded rationality and strategic complementarity in a macroeconomic model: policy effects, persistence, and multipliers

Antulio Bomfim and Francis Diebold

No 97-18, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Motivated by recent developments in the bounded rationality and strategic complementarity literatures, we examine an intentionally simple and stylized aggregative economic model when the assumptions of fully rational expectations and no strategic interactions are relaxed. We show that small deviations from rational expectations, taken alone, lead only to small deviations from classical policy-ineffectiveness, but that the situation can change dramatically when strategic complementarity is introduced. Strategic complementarity magnifies the effects of even small departures from rational expectations, producing equilibria with policy effectiveness, output persistence, and multiplier effects.

Keywords: Rational; expectations; (Economic; theory) (search for similar items in EconPapers)
Date: 1997
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Related works:
Journal Article: Bonded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers (1997)
Working Paper: Bounded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers (1996)
Working Paper: Bounded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers
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