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Expectations and Adjustment: An Alternative Approach with an Application to Overlapping Wage Contracts

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  • Pemberton, James

Abstract

In many contexts, individual agents' behavior depends on their expectations of other agents' expectations, about which there is no available source of objective information. Standard rational expectations models have avoided, not resolved, this problem. This paper models an alternative approach involving asymmetric adjustment in response to exogenous shocks. This is applied to a model of overlapping wage contracts and causes wages to fall slower in response to deflationary shocks than they rise in response to expansionary shocks. This contrasts with standard overlapping contract models incorporating rational expectations in which adjustment is symmetric. Copyright 1988 by The London School of Economics and Political Science.

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  • Pemberton, James, 1988. "Expectations and Adjustment: An Alternative Approach with an Application to Overlapping Wage Contracts," Economica, London School of Economics and Political Science, vol. 55(219), pages 379-391, August.
    • Handle: RePEc:bla:econom:v:55:y:1988:i:219:p:379-91
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    Cited by:

    1. Amal Sanyal, 2005. "Keynes’ Metaphor of the Newspaper Competition: A Model," Macroeconomics 0501015, University Library of Munich, Germany.
    2. Patrick Artus, 1990. "Spéculateurs hétérogènes et chocs monétaires," Revue Économique, Programme National Persée, vol. 41(5), pages 895-922.

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