DiscussionUncertainty, policy ineffectiveness and long stagnation of the macroeconomy

When reform has no direct aggregate effects, but only changes agents' incentives to act, uncertainty can weaken its effect. Because agents learn about policy change by observing their signals, increasing signal noise makes it harder for agents to know that reform has occurred. When policy changes are difficult to observe, they change agents' actions less and have less aggregate effect. This is the main point illustrated in the model by Aoki and Yoshikawa.