Stabilization policy is feasible and desirable in a class of standard new classical rational expectations macromodels even when full information output is policy independent. Neither different information across private agents nor the existence of an economy-wide financial market are necessary...

This paper proves that the variability of output over the business cycle can be exacerbated due to the expected inflation effect even in new classical models with fully flexible prices. The authors also consider a variant of Fischer's rational expectations model with overlapping wage contracts....