Imperfect competition and the modelling of expectations in macroeconomics |
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| Authors: | Neil Rankin |
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| Institution: | (1) Department of Economics, University of Warwick, Coventry, CV4 7AL, UK |
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| Abstract: | We show that when a model of the macroeconomy is based on imperfect, rather than perfect, competition, this may increase the
problem of how to model agents’ expectations. We provide a simple example using an overlapping-generations economy with the
potential for unemployment. Under certain assumptions about how consumers migrate between locations between the first and
second periods of their lives, this extra issue regarding expectations arises. Imperfect competition may increase agents’
forecasting difficulties because they have to forecast not only future equilibrium prices, but also future out-of-equilibrium
prices, and by definition the latter are never actually observed.
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| Keywords: | Imperfect competition Macroeconomics Rationality of expectations |
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