Do heterogeneous expectations constitute a challenge for policy interaction?
No 13-02, Working Papers Series 2 from ISCTE-IUL, Business Research Unit (BRU-IUL)
Yes, indeed; at least when it comes to fiscal and monetary policy interaction. We examine a Neo-Classical economy, where agents have either rational or adaptive expectations. We demonstrate that the monetarist solution can be unique and stationary under a passive fiscal/active monetary policy regime, because active monetary policy incorporates expectational heterogeneity. In contrast, under an active fiscal/passive monetary policy regime, the fiscalist solution is prone to explosive dynamics d e to empirically plausible expectational heterogeneity. However, conditional on stationarity, both regimes can yield promising business cycle dynamics, which are absent in the homogeneous expectations benchmark.
Keywords: Inflation; Heterogeneous Expectations; Fiscal and Monetary Policy (search for similar items in EconPapers)
JEL-codes: D84 E31 E52 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Journal Article: DO HETEROGENEOUS EXPECTATIONS CONSTITUTE A CHALLENGE FOR POLICY INTERACTION? (2018)
Working Paper: Do heterogeneous expectations constitute a challenge for policy interaction? (2016)
Working Paper: Do heterogeneous expectations constitute a challenge for policy interaction? (2015)
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