Price Expectations and Equilibrium When the Interest Rate Is Pegged.

The results of recent analyses of interest rate pegging, in the context of macromodels incorporating rational expectations, stand in marked contrast to the classic Wicksellian conclusions. This paper examines this discrepancy. It is argued that the contrast is by no means wholly to the disadvantage of the Wicksellian analysis. There are considerable problems in providing a credible account of the economic mechanisms that could produce convergence on the solution obtained via rational expectations mathematics. Further, the Wicksellian process is consistent with correct expectations of inflation, although not with aggregate demand/supply equilibrium. Copyright 1989 by Scottish Economic Society.