Imperfect Competition, Expectations and the Multiple Effects of Monetary Growth.

In a monetary overlapping generations model with an imperfectly competitive labor market in which output is below its full-employment level, it is shown that different backward-looking rules for forecasting inflation lead to different steady states, despite yielding no forecast errors in the steady state and, in many cases, none in the short or medium run either. Higher monetary growth raises output in some steady states, in others has no effect, and in others lowers it. This contrasts with ad hoc or competitive macromodels where the absence of forecast errors in the steady state usually defines it and its properties uniquely. Copyright 1992 by Royal Economic Society.