Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5098489 | Journal of Economic Dynamics and Control | 2014 | 15 Pages |
Abstract
In the paper we show - using standard approaches, general equilibrium modeling and the assumption of complete rationality - that the macroeconomic environment is endogenous and is indeterminate. Specifically, it is argued - without resorting to sunspot type arguments - that microeconomic fundamentals do not suffice to characterize the economy at the macro level. In particular, we show how perceptions of rational agents of the workings of the economy (a) shape the environment, (b) affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not. As a by-product, we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise. Finally, we show that systematic errors can persist indefinitely under rationality.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Maciej K. Dudek,