Uncertainty, Policy Ineffectiveness and Long Stagnation of the Macroeconomy

When reform has no direct aggregate effects, but only changes agents ’ incentives to act, uncer-tainty can weaken its effect. Because agents learn about policy change by observing their signals, increasing signal noise makes it harder for agents to know that reform has occurred. When policy changes are difficult to observe, they change agents ’ actions less and have less aggregate effect. This is the main point illustrated in the model by Aoki and Yoshikawa. 1 Key Features of the Model To highlight the model’s mechanism, I will examine the origin of the transition rates put forward in equations (4) and (5). What are the decisions agents are making that cause this fraction of them to choose high or low output each period? In the process, we will revisit the question of what particular kind of uncertainty the paper is talking about, and which assumptions about the environment are crucial. A large number of agents choose one of two actions: high output y? or low output y. Each agent’s choice about which action to take depends on a signal they observe about the profitability of each action and the actions that other agents are taking. The payoff to y? is V1(ȳ); the payoff to y is V2(ȳ), where y ̄ is the average output per capita. Since y ̄ depends on the output decisions o