Abstract
In his chapter V on the dynamic analysis of a Keynesian model Sargent (1979) analyzes the effects of a sudden change in the money supply (via open-market operations) for the case of adaptive expectations as well as for perfect foresight. However, the result he derives for the latter case (strict neutrality if the change in monetary policy is not foreseen and reaction which even precedes action when it is foreseen) look very odd when considered from the viewpoint of the standard dynamic analysis that he applies in the adaptive expectations case. Hence, solution methods must be different when the dynamic laws which govern prices and related expectations are changed from the adaptive to the perfect foresight case — despite the fact that only ordinary differential equations are applied in both cases. This change in methods and results is insufficiently explained and motivated by Sargent. Furthermore, and more importantly, his way of reasoning conceals significant ambiguities and inconsistencies in the analyzed dynamic situation.
The authors thank B. Adolph, W. Heering, U. Krause, K. Jaeger and D. Weiler for helpful suggestions in the course of preparing this final version of the manuscript.
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Flaschel, P., Picard, R. (1986). Problems Concerning the Dynamic Analysis of a Keynesian Model with Perfect Foresight. In: Semmler, W. (eds) Competition, Instability, and Nonlinear Cycles. Lecture Notes in Economics and Mathematical Systems, vol 275. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-51699-3_12
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