History Vs. Expectations

Paul Krugman

No 2971, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In models with external economies, there are often two or more long run equilibria. Which equilibrium is chosen? Much of the literature presumes that "history" sets initial conditions which determine the outcome, but an alternative view stresses the role of "expectations", i.e. of self-fulfilling prophecy. This paper uses a simple trade model with both external economies and adjustment costs to show how the parameters of the economy determine the relative importance of history and expectations in determining equilibrium.

Date: 1989-05
Note: ITI IFM
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Published as Krugman, Paul. "History Versus Expectations," Quarterly Journal of Economics, 1991, v106(2), 651-667.

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