Bounded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers / Antulio N. Bomfim, Francis X. Diebold.

Format:

Book

Author/Creator:

Bomfim, Antulio N.

Contributor:

National Bureau of Economic Research.

Diebold, Francis X.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5482.

NBER working paper series no. w5482

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Bounded Rationality and Strategic Complementarity in a Macroeconomic Model

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Summary:

Motivated by recent developments in the bounded rationality and strategic complementarity literatures, we examine an intentionally simple and stylized aggregative economic model, when the assumptions of fully rational expectations and no strategic interactions are relaxed. We show that small deviations from rational expectations, taken alone, lead only to small deviations from classical policy- ineffectiveness, but that the situation can change dramatically when strategic complementarity is introduced. Strategic complementarity magnifies the effects of even small departures from rational expectations, producing equilibria with policy effectiveness, output persistence and multiplier effects.

Notes:

Print version record

March 1996.