Do heterogeneous expectations constitute a challenge for policy interaction?

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Diskussionsbeiträge ; No. 2016/14

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Expectations; Speculations ; Monetary Policy ; Fiscal Policy
• Subject: inflation ; heterogeneous expectations ; fiscal and monetary policy interaction

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gasteiger, Emanuel
• Event: Veröffentlichung
• (who): Freie Universität Berlin, Fachbereich Wirtschaftswissenschaft
• (where): Berlin
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/144558
• Last update: 10.03.2025, 11:43 AM CET