NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Towards A Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria

J. Peter Neary, Joseph E. Stiglitz

NBER Working Paper No. 376 (Also Reprint No. r0492)
Issued in June 1984
NBER Program(s):   PE

A two-period model of temporary equilibrium with rationing is presented, paying particular attention to agents' expectations of future constraints. it is shown that with arbitrary constraint expectations many different types of current equilibria may be consistent with the same set of (current and expected future) wages and prices, and that constraint expectations tend to be self-fulfilling (e.g., a higher expectation of Keynesian unemployment tomorrow increases the probability that it will prevail today). In addition, rational constraint expectations (i.e., perfect foresight of future constraint levels) are shown to enhance rather than reduce the effectiveness of government policy.

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Published: Neary, J. Peter and Joseph E. Stiglitz. "Towards A Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria." Quarterly Journal of Economics, Vol. 98, Supplement, (1983), pp. 199-228.

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