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1 results

  • DO HETEROGENEOUS EXPECTATIONS CONSTITUTE A CHALLENGE FOR POLICY INTERACTION?

  • Emanuel Gasteiger
  • Journal:
    Macroeconomic Dynamics / Volume 22 / Issue 8 / December 2018
    Published online by Cambridge University Press:
    20 September 2017, pp. 2107-2140

  • 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.