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Do heterogeneous expectations constitute a challenge for policy interaction?

Emanuel Gasteiger

No 214, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: Yes, indeed; at least for macroeconomic policy interaction. We examine a Neo- Classical economy and provide the conditions for policy arrangements to successfully stabilize the economy when agents have either rational or adaptive expectations. For a contemporaneous-data monetary policy rule, the monetarist solution is unique and stationary under a passive fiscal/active monetary policy regime if monetary policy appropriately incorporates expectational heterogeneity. In contrast, the active fiscal/passive monetary policy regime’s fiscalist solution is prone to explosiveness due to empirically plausible expectational heterogeneity. Nevertheless, this can be a well-defined, rather orthodox equilibrium. For operational monetary policy rules, only the results for the fiscalist solution prevail. Moreover, our results are plausible from an adaptive learning viewpoint and, conditional on stationarity, both regimes yield promising business cycle dynamics.

Keywords: Inflation; Heterogeneous Expectations; Fiscal and Monetary Policy Interaction (search for similar items in EconPapers)
JEL-codes: E31 D84 E52 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2015
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Related works:
Journal Article: DO HETEROGENEOUS EXPECTATIONS CONSTITUTE A CHALLENGE FOR POLICY INTERACTION? (2018) Downloads
Working Paper: Do heterogeneous expectations constitute a challenge for policy interaction? (2016) Downloads
Working Paper: Do heterogeneous expectations constitute a challenge for policy interaction? (2013) Downloads
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