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Toward a Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria

Neary, J. Peter; Stiglitz, Joseph E.

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 equilibrium may be consistent with the same set of (current and expected future) wages and prices, and that constraint expectations exhibit "bootstraps" properties (e.g., a higher expectation of Keynesian unemployment tomorrow increases the probability that it will prevail today). In addition, the concept of rational constraint expectations (i.e., perfect foresight of future constraints) is introduced and shown to enhance rather than reduce the effectiveness of government policy.

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Quarterly Journal of Economics

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Business
Published Here
July 2, 2012
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