Imperfect Competition, Expectations and the Effectiveness of Monetary Policy
A monetary overlapping generations model with oligopolistic imperfect competition is constructed. In general, output and employment are below their full employment levels. Three alternative expectations hypotheses are used -- 'adaptive', 'monetarist' and 'pure rational' -- all of which ensure no expectations errors in the steady state. All three lead to different steady states, with contrasting output responses to the rate of monetary growth, despite constraining expectations to be 'rational' in the steady state. With imperfect competition of this type, rational expectations steady states themselves, and not just transition paths to the steady state, are dependent on the 'learning' process by which expectations are form.
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adaptive expectations aggregate demand alternative expectations hypotheses assumed assumption average correct behaviour Centre for Economic CEPR Discussion Paper Cobb-Douglas comparative static properties condition that expectations consumers consumption are gross current and past decision problem defined difference equation different steady dy/dft dynamics Economic Policy Research economy effectiveness of monetary elasticity of expectations ensure expectations are rational expectations elasticity exceeds expectations hypothesis expectations mechanism expectations model expectations-formation process expression following Hart 1982 form expectations future price gross substitutes imperfect competition imperfectly competitive agents imperfectly competitive equilibrium labour market Macroeconomics market labour demand maximisation monetarist expectations monetary growth monetary policy money income money supply monopolistic competition oligopolistic past values past variables path period price-takers production function pure rational expectations raise output Rankin rate of monetary saddlepoint stability sellers simply solution solved sumption t-t t t taken as given temporary equilibrium tion trade union unity weighting effect yields young's consumption youngs-elasticity effect