Self-Fulfilling Expectations and Fluctuations in Aggregate Demand
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
econornic 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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