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Is Optimism Good in a Keynesian Economy?

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  • Torsten Persson
  • Lars E.O. Svensson

Abstract

Assume that an economy is in a state of Keynesian unemployment. Since production is demand-determined there are bootstraps (multiple) equilibria. Then, the more optimist agents are about the future the higher will be theur demand today and hence current production. In that limited sense optimism turns out to be unwarranted , which forces a download adjustment. Is this unwarranted optimism still good? We analyze this question by help of a general equilibrium model of a small open economy where the sequence of adjustment and readjustment is modeled as two successive temporary equilibria. The question wheter optimism is good is posed in terms of an explicit ( ex post) welfare evaluation. We fine that if the future is Walrasian, the future multiplier is unity, whereas the present multiplier is larger than unity. Then optimism increases ex post welfare. If the future has Keynesian unemployment, optimism still increases ex post welfare, as long as the present multiplier is larger than the future one. A necessary and sufficient condition for this is presented.

Suggested Citation

  • Torsten Persson & Lars E.O. Svensson, 1983. "Is Optimism Good in a Keynesian Economy?," NBER Working Papers 1071, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1071
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    References listed on IDEAS

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    1. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
    2. Razin, Assaf, 1984. "Capital movements, intersectoral resource shifts and the trade balance," European Economic Review, Elsevier, vol. 26(1-2), pages 135-152.
    3. J. Peter Neary, 1980. "Nontraded Goods and the Balance of Trade in a Neo-Keynesian Temporary Equilibrium," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(3), pages 403-429.
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    Cited by:

    1. Benassy, Jean-Pascal, 1993. "Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 732-761, June.
    2. Benassy, Jean-Pascal, 1990. "Non-Walrasian equilibria, money, and macroeconomics," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 4, pages 103-169, Elsevier.
    3. Goldfajn, Ilan & Silveira, Marcos Antonio, 2002. "Should government smooth exchange rate risk?," Journal of Development Economics, Elsevier, vol. 69(2), pages 393-421, December.
    4. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    5. van der Ploeg, F., 1987. "Rationing in open economy and dynamic macroeconomics : A survey," Other publications TiSEM fd411b51-f487-4dde-a0e9-6, Tilburg University, School of Economics and Management.

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