Working Paper: NBER ID: w2971
Authors: Paul Krugman
Abstract: In models with external economies, there are often two or more long run equilibria. Which equilibrium is chosen? Much of the literature presumes that "history" sets initial conditions which determine the outcome, but an alternative view stresses the role of "expectations", i.e. of self-fulfilling prophecy. This paper uses a simple trade model with both external economies and adjustment costs to show how the parameters of the economy determine the relative importance of history and expectations in determining equilibrium.
Keywords: external economies; multiple equilibria; expectations; history
JEL Codes: F0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| historical events (N94) | equilibrium outcomes (D51) |
| expectations (D84) | equilibrium outcomes (D51) |
| expectations (D84) | self-fulfilling prophecies (D84) |
| self-fulfilling prophecies (D84) | equilibrium outcomes (D51) |
| historical events and expectations (D84) | equilibrium outcomes (D51) |