Anticipations, Recessions and Policy: An Intertemporal Disequilibrium Model
46 Pages Posted: 15 Mar 2004 Last revised: 29 Aug 2010
Date Written: August 1982
This paper presents an intertemporal disequilibrium model with rational expectations, i.e. a model in which agents anticipate the future rationally, but in which prices and wages may not adjust fast enough to maintain continuous market clearing. Therefore, optimizing firms and households base their intertemporal plans on anticipations of both future quantity constraints and future prices. Such a model shows clearly that the effect of a policy depends not only on its current values but its anticipated path, After a presentation of the model and its basic dynamics, we therefore consider the effects of various paths of fiscal policy on the economy.
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