Towards a Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria

57 Pages Posted: 22 Feb 2001 Last revised: 14 Jul 2010

See all articles by J. Peter Neary

J. Peter Neary

University of Oxford - Department of Economics; Centre for Economic Policy Research (CEPR)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: August 1979

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

Neary, J. Peter and Stiglitz, Joseph E., Towards a Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria (August 1979). NBER Working Paper No. w0376. Available at SSRN: https://ssrn.com/abstract=261229

J. Peter Neary (Contact Author)

University of Oxford - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

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