Publication Date: 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.
Overlapping generations, Perfect foresight, Short run policy eﬀectiveness
JEL Classification Codes: 023, 021
See CFP: 1120