Expectations Traps and Coordination Failures: Selecting Among Multiple Discretionary Equilibria

Dennis, R. and Kirsanova, T. (2010) Expectations Traps and Coordination Failures: Selecting Among Multiple Discretionary Equilibria. Working Paper. Social Science Research Network. (doi: 10.2139/ssrn.1664924).

Abstract

Discretionary policymakers cannot manage private-sector 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, self-enforceability, 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 Pareto-preferred equilibrium is learnable by private agents, we find little reason to expect coordination on that equilibrium.

• Item Type: Research Reports or Papers (Working Paper)
• Additional Information: Published online
• Keywords: Discretionary policymaking, multiple equilibria, coordination, equilibrium selection
• Status: Published
• Glasgow Author(s) Enlighten ID: Kirsanova, Professor Tatiana
• Authors: Dennis, R., and Kirsanova, T.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: SSRN eLibrary
• Publisher: Social Science Research Network