Dennis, Richard and Kirsanova, Tatiana (2010): Expectations Traps and Coordination Failures: Selecting among Multiple Discretionary Equilibria.

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Abstract
Discretionary policymakers cannot manage privatesector expectations and cannot coordinate the actions of future policymakers. As a consequence, expectations traps and coordination failures can occur and multiple equilibria can arise. To utilize the explanatory power of models with multiple equilibria it is �first necessary to understand how an economy arrives to a particular equilibrium. In this paper, we employ notions of learnability, selfenforceability, and properness to motivate and develop a suite of equilibrium selection criteria. Central among these criteria are whether the equilibrium is learnable by private agents and jointly learnable by private agents and the policymaker. We use two New Keynesian policy models to identify the strategic interactions that give rise to multiple equilibria and to illustrate our equilibrium selection methods. Importantly, unless the Paretopreferred equilibrium is learnable by private agents, we �find little reason to expect coordination on that equilibrium.
Item Type:  MPRA Paper 

Original Title:  Expectations Traps and Coordination Failures: Selecting among Multiple Discretionary Equilibria 
Language:  English 
Keywords:  Discretionary policymaking, multiple equilibria, coordination, equilibrium selection 
Subjects:  E  Macroeconomics and Monetary Economics > E5  Monetary Policy, Central Banking, and the Supply of Money and Credit > E52  Monetary Policy E  Macroeconomics and Monetary Economics > E6  Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61  Policy Objectives; Policy Designs and Consistency; Policy Coordination C  Mathematical and Quantitative Methods > C6  Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C62  Existence and Stability Conditions of Equilibrium C  Mathematical and Quantitative Methods > C7  Game Theory and Bargaining Theory > C73  Stochastic and Dynamic Games; Evolutionary Games; Repeated Games 
Item ID:  24616 
Depositing User:  Tatiana Kirsanova 
Date Deposited:  25. Aug 2010 13:52 
Last Modified:  11. Feb 2013 23:47 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/24616 