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Tobin (1975) meets rational expectations

Author

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  • Emiliano Libman

    (Business School and CIMaD, University of San Martín, Buenos Aires, Argentina)

Abstract

In his 1975 paper, Tobin formalizes one of the main lessons from Keynes's General Theory: the idea that price flexibility is destabilizing. We propose a modified model à la Tobin by including rational expectations and staggered price setting, to show that under some conditions (a strong Tobin effect), there exist an infinite number of equilibrium paths that converge to equilibrium. Tobin was right: the most problematic assumption of modern macroeconomics is not rational expectations per se, but rather price flexibility and continuous market clearing.

Suggested Citation

  • Emiliano Libman, 2020. "Tobin (1975) meets rational expectations," Review of Keynesian Economics, Edward Elgar Publishing, vol. 8(1), pages 102-118, January.
    • Handle: RePEc:elg:rokejn:v:8:y:2020:i:1:p102-118
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    More about this item

    Keywords

    price flexibility; Tobin; rational expectations; New Consensus model;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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