Expectations Traps and Coordination Failures with Discretionary Policymaking

Richard Dennis and Tatiana Kirsanova

No 2013-18, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: Discretionary policymakers cannot manage private-sector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple equilibria it is first necessary to understand how an economy arrives to a particular equilibrium. In this paper we employ notions of learnability and self-enforceability to motivate and identify equilibria of particular interest. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our methods for identifying equilibria of interest. Importantly, unless the Pareto-preferred equilibrium is learnable by private agents, we find little reason to expect coordination on that equilibrium.

Keywords: Discretionary policymaking; multiple equilibria; coordination; equilibrium selection (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cdm, nep-mac and nep-mic
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Citations: View citations in EconPapers (2)

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Working Paper: Expectations Traps and Coordination Failures with Discretionary Policymaking (2013)
Working Paper: Expectations Traps and Coordination Failures with Discretionary Policymaking (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:449

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