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Do heterogeneous expectations constitute a challenge for policy interaction?

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  • Gasteiger, Emanuel
Abstract
Yes, indeed; at least for macroeconomic policy interaction. We examine a Neo-Classical economy and provide the conditions for policy arrangements to successfully stabilize the economy when agents have either rational or adaptive expectations. For a contemporaneous-data monetary policy rule, the monetarist solution is unique and stationary under a passive fiscal/active monetary policy regime if monetary policy appropriately incorporates expectational heterogeneity. In contrast, the active fiscal/passive monetary policy regime's fiscalist solution is prone to explosiveness due to empirically plausible expectational heterogeneity. Nevertheless, this can be a well-defined, rather orthodox equilibrium. For operational monetary policy rules, only the results for the fiscalist solution prevail. Moreover, our results are plausible from an adaptive learning viewpoint.

Suggested Citation

  • Gasteiger, Emanuel, 2016. "Do heterogeneous expectations constitute a challenge for policy interaction?," Discussion Papers 2016/14, Free University Berlin, School of Business & Economics.
    • Handle: RePEc:zbw:fubsbe:201614
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    Cited by:

    1. Beqiraj Elton & Di Bartolomeo Giovanni & Serpieri Carolina, 2017. "Bounded-rationality and heterogeneous agents: Long or short forecasters?," wp.comunite 00132, Department of Communication, University of Teramo.
    2. Elton Beqiraj & Giovanni Di Bartolomeo & Marco Di Pietro & Carolina Serpieri, 2020. "Bounded rationality and heterogeneous expectations: Euler versus anticipated-utility approach," Journal of Economics, Springer, vol. 130(3), pages 249-273, August.
    3. Hommes, Cars & Lustenhouwer, Joep & Mavromatis, Kostas, 2018. "Fiscal consolidations and heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 173-205.
    4. Ilabaca, Francisco & Milani, Fabio, 2021. "Heterogeneous expectations, indeterminacy, and postwar US business cycles," Journal of Macroeconomics, Elsevier, vol. 68(C).
    5. Evans, David & Li, Jungang & McGough, Bruce, 2023. "Local rationality," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 216-236.
    6. Branch, William A. & Gasteiger, Emanuel, 2019. "Endogenously (non-)Ricardian beliefs," ECON WPS - Working Papers in Economic Theory and Policy 03/2019, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.

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    More about this item

    Keywords

    inflation; heterogeneous expectations; fiscal and monetary policy interaction;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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