Equilibrium Coordination With Discretionary Policy Making

Abstract

Discretionary policymakers cannot manage private-sector expectations and cannot coor- dinate the actions of future policymakers. As a consequence, coordination failures can occur and multiple equilibria can arise. In this paper we employ notions of self-enforceability and learnability to motivate and identify equilibria of particular interest in discretionary policy problems exhibiting multiple equilibria. Central among these criteria are whether an equilib- rium is robust to the formation of coalitions, and whether it is learnable by private agents and jointly learnable by private agents and the policymaker. Unless the Pareto-preferred equilibrium is learnable by private agents we find little reason to expect coordination on that equilibrium.