Short-run expectational coordination: Fixed versus flexible wages

This paper considers a simple "three-goods" model and focuses attention on the expectational stability of its equilibria. The setting allows us to des cribe stylized general equilibrium macro interactions: firms hire workers a nd then sell production to buyers whose purchasing power depends on the fir ms' previous decisions. We assess expectational stability from an "eductive " learning procedure that reflects basic rationality considerations. From o ur viewpoint on coordination, we compare the merits of fixed wages versus f lexible wages. Although in both cases the same factors-supply and demand el asticities, marginal propensity to save-are effective, expectational coordi nation is often more successful with flexible wages.