BOUNDED RATIONALITY AND STRATEGIC COMPLEMENTARITY IN A MACROECONOMIC MODEL - POLICY EFFECTS, PERSISTENCE AND MULTIPLIERS

Motivated by recent developments in the bounded rationality and strate gic complementarity literatures, we examine an intentionally simple an d stylised aggregative economic model, when the assumptions of fully r ational expectations and no strategic interactions are relaxed, We sho w that small deviations from rational expectations. taken alone, lead only to small deviations from classical policy -ineffectiveness, but t hat the situation can change dramatically when strategic complementari ty is introduced. Strategic complementarity magnifies the effects of e ven small departures from rational expectations, producing equilibria with policy effectiveness, output persistence and multiplier effects.