In this paper we use a non-tâtonnement dynamic macroeconomic model to study the role of expectations and wages in the business cycle. Following a restrictive monetary shock, the economy may converge to a deflationary quasi-stationary Keynesian underemployment state. If consumers can be convinced to hold inflationary expectations, the economy recovers to full employment, but only if the recession is not too deep. In addition, and consistent with perfect foresight, there may be endogenous expectations-switching. If inflationary expectations are not sufficient to exit from the recession, imposing downward rigidity and upward flexibility of nominal wages helps to accomplish it.

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