COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 778 "Walrasian Indeterminacy and Keynesian Macroeconomics" John Geanakoplos and Heracles M. Polemarchakis October 1985 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. |
