Do heterogeneous expectations constitute a challenge for policy interaction?
No 2016/14, Discussion Papers from Free University Berlin, School of Business & Economics
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.
Keywords: inflation; heterogeneous expectations; fiscal and monetary policy interaction (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-cse, 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? (2015)
Working Paper: Do heterogeneous expectations constitute a challenge for policy interaction? (2013)
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