NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Self-Fulfilling Expectations and Fluctuations in Aggregate Demand

Michael Woodford

NBER Working Paper No. 3361
Issued in May 1990
NBER Program(s):   EFG

The paper presents an intertemporal general equilibrium model with rationing in the product market, in which stationary sunspot equilibria are shown to exist, indicating the possibility of fluctuations in economic activity simply due to self-fulfilling variations in economic agents' expectations. Specifically, revised expectations about future aggregate demand change current investment demand, which (amplified by a multiplier" process) then affects current aggregate demand. Parameter values required for endogenous fluctuations are discussed, as well as quantitative properties of the fluctuations predicted. Countercyclical stabilization policies are shown to rule out such equilibria.

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Document Object Identifier (DOI): 10.3386/w3361

Published: N.G. Mankiw and D. Romer, eds., New Keynesian Economics, Vol. 2, pp.77-110, Cambridge: MIT Press, 1991.

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