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Towards A Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria

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  • J. Peter Neary
  • Joseph E. Stiglitz

Abstract

A two-period model of temporary equilibrium with rationing is presented, paying particular attention to agents' expectations of future constraints. it is shown that with arbitrary constraint expectations many different types of current equilibria may be consistent with the same set of (current and expected future) wages and prices, and that constraint expectations tend to be self-fulfilling (e.g., a higher expectation of Keynesian unemployment tomorrow increases the probability that it will prevail today). In addition, rational constraint expectations (i.e., perfect foresight of future constraint levels) are shown to enhance rather than reduce the effectiveness of government policy.

Suggested Citation

  • J. Peter Neary & Joseph E. Stiglitz, 1979. "Towards A Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria," NBER Working Papers 0376, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0376
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    References listed on IDEAS

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    1. Dixit, Avinash, 1976. "Public finance in a Keynesian temporary equilibrium," Journal of Economic Theory, Elsevier, vol. 12(2), pages 242-258, April.
    2. Avinash Dixit, 1978. "The Balance of Trade in a Model of Temporary Equilibrium with Rationing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 393-404.
    3. Jean-Pascal Benassy, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(4), pages 503-523.
    4. Muellbauer, John & Portes, Richard, 1978. "Macroeconomic Models with Quantity Rationing," Economic Journal, Royal Economic Society, vol. 88(352), pages 788-821, December.
    5. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    6. Blad, M.C. & Kirman, A.P., 1978. "The Long Run Evolution of a Rationed Equilibrium Model," The Warwick Economics Research Paper Series (TWERPS) 128, University of Warwick, Department of Economics.
    7. Bohm, Volker, 1978. "Disequilibrium dynamics in a simple macroeconomic model," Journal of Economic Theory, Elsevier, vol. 17(2), pages 179-199, April.
    8. Grandmont, Jean-Michel, 1993. "Temporary general equilibrium theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 19, pages 879-922, Elsevier.
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