DP291 | Imperfect Competition, Expectations and the Effectiveness of Monetary Policy

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01/04/1989

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Abstract

A monetary overlapping generations model with oligopolistic imperfect competition is constructed. In general, output and employment are below their full employment levels. Three alternative expectations hypotheses are used - 'adaptive', 'monetarist' and 'pure rational' - all of which ensure no expectations errors in the steady state. All three lead to different steady states, with contrasting output responses to the rate of monetary growth, despite constraining expectations to be 'rational' in the steady state. With imperfect competition of this type, rational expectations steady states themselves, and not just transition paths to the steady state, are dependent on the 'learning' process by which expectations are form.