Noisy Implementation Cycles and the Informational Role of Policy

Pasquale Scaramozzino and Nir Vulkan ()
Additional contact information
Nir Vulkan: Department of Economics, University of Bristol, UK

No 81, Working Papers from Department of Economics, SOAS University of London, UK

Abstract: Macroeconomic models of fluctuations based on self-fulfilling equilibria require that expectations and beliefs are common knowledge to all economic agents. If instead we assume that there is some noise in the firms' perception of the fundamentals then the results change significantly, even if the noise is small. Using Shleifer's (1986) implementation cycle model, we show that, in the presence of uncertainty, agents will be slow to adjust to changing fundamentals, and that endogenous co-ordination on short cycles will occur. Thus, the indeterminacy result of models with self-fulfilling equilibria could be a very fragile feature of these models. The possibility of longer cycles (which could be Pareto-efficient under some of Shleifer's assumptions) could however be restored, if a credible announcement (for instance by the policy authorities) can act as a co-ordinating device. Moreover, a long cycle becomes focal in the light of the announcement. By providing an explicit model which explains why firms are slow to adjust to changing fundamentals we are therefore able to gain useful insights into the type of policies which can significantly affect firm behaviour.

Pages: 14 pages
Date: 1999-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.soas.ac.uk/sites/default/files/2022-10/economics-wp081.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:soa:wpaper:81

Access Statistics for this paper

More papers in Working Papers from Department of Economics, SOAS University of London, UK Contact information at EDIRC.
Bibliographic data for series maintained by Chandni Dwarkasing ().