ON MULTIPLE EQUILIBRIA AND THE RATIONAL-EXPECTATIONS HYPOTHESIS

This paper analyzes through a simple two-period model the fact that, i f some agents hold inside money intertemporally, the second-period ''n ormalization'' matters. Thus, there are several equilibria of the seco nd-period economy, indexed by the level of inflation. A concept of equ ilibrium acknowledging this fact, and requiring that agents put some w eight on any of the possible second-period equilibrium price vectors i s developed. Such an equilibrium is shown to exist, and is illustrated by an example.