Stabilization policies in a disequilibrium growth model

The stabilization trade-off between Inflation and unemployment is investigated in a continuous time growth model where disequilibrium can occur in the labor market. The emphasis of the paper is on the policy implications of rational expectations, as an alternative to adaptive expectations. The rational expectations approach is useful in describing the way in which a particular policy plan alters economic agents' expectations of future inflation rates. It is shown that it is not possible to achieve an unemployment rate which is deterministically different from the equilibrium rate, when economic agents form expectations rationally.