Title

Walrasian Indeterminacy and Keynesian Macroeconomics

Document Type

Discussion Paper

Publication Date

10-1-1985

CFDP Number

778

CFDP Pages

52

Abstract

Overlapping generations models with or without production or a portfolio demand for money display a fundamental indeterminacy. Expectations matter; and they are not, in the short run, constrained by the hypotheses of agent optimization, rational expectations, and market clearing. No short run policy analysis is possible without some explicit understanding of how agents expect the economy to respond to the policy. In this framework of perfect foresight and market clearing prices, it is possible to make Keynesian assumptions about the rigidity of money wages and the exogeneity of “animal spirits” of investors, to use the standard IS-LM apparatus, and to derive Keynesian conclusions about the short run effectiveness of policy. Alternatively, starting from difference but no less rational expectations, one can derive the “new classical” neutrality propositions.

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