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The B.E. Journal of Macroeconomics

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Bounded rationality and the ineffectiveness of big push policies

Wei Xiao
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  • Department of Economics, State University of New York at Binghamton, Binghamton, NY 13902, USA
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/ Junyi Xu
Published Online: 2018-09-26 | DOI: https://doi.org/10.1515/bejm-2017-0182


If a poverty trap exists, can a big-push policy lift the economy out of it? This paper applies Sargent’s [Sargent, Thomas J. 1993. Bounded Rationality in Macroeconomics. New York: Oxford University Press] bounded rationality approach to study the post-policy transition of an economy from a low-income equilibrium to a high-income equilibrium. The effectiveness of the policy diminishes if individuals are adaptive learners who cannot make optimal decisions instantaneously. This paper contributes to the renewed discussion on the effectiveness of massive aid policies for developing countries from a theoretical perspective.

Keywords: big push policy; bounded rationality; learning; massive aid policies; poverty trap

JEL Classification: D83; O11; E1


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About the article

Published Online: 2018-09-26

Citation Information: The B.E. Journal of Macroeconomics, 20170182, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2017-0182.

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