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Learnability and equilibrium selection under indeterminacy

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  • Hirose, Yasuo

Abstract

This paper presents an equilibrium selection procedure for linear rational expectations models under equilibrium indeterminacy. In the procedure, a specific equilibrium is chosen such that the perceived law of motion for agents with adaptive learning rules converges to the particular solution. The procedure is applicable only under empirically implausible parameter settings if the agents perceive fundamental shock processes completely. However, if they misperceive the fundamental shocks in some degree, the procedure works under plausible parameters. It is also demonstrated that the selected particular solution exhibits different dynamics from that under the assumption often made in the literature.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 32 (2008)
Issue (Month): 11 (November)
Pages: 3459-3477

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Handle: RePEc:eee:dyncon:v:32:y:2008:i:11:p:3459-3477

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Indeterminacy Learning Expectational stability Rational expectations Equilibrium selection;

References

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  1. Bennett T. McCallum, 2003. "Multiple-Solution Indeterminacies in Monetary Policy Analysis," NBER Working Papers 9837, National Bureau of Economic Research, Inc.
  2. Schmitt-Grohé, Stephanie, 1999. "Endogenous Business Cycles and the Dynamics of Output, Hours, and Consumption," CEPR Discussion Papers 2315, C.E.P.R. Discussion Papers.
  3. Seppo Honkapohja & Kaushik Mitra, . "Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?," Discussion Papers 01/05, Department of Economics, University of York.
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  8. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
  9. Evans, George W. & Honkapohja, Seppo, 1999. "Learning dynamics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 7, pages 449-542 Elsevier.
  10. George W. Evans & Bruce McGough, 2002. "Indeterminacy and the Stability Puzzle in Non-Convex Economies," University of Oregon Economics Department Working Papers 2002-14, University of Oregon Economics Department, revised 27 Aug 2005.
  11. Farmer, Roger E. A. & Jang-Ting, Guo, 1995. "The econometrics of indeterminacy: an applied study," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 225-271, December.
  12. Xiao, Wei, 2004. "Can indeterminacy resolve the cross-country correlation puzzle?," Journal of Economic Dynamics and Control, Elsevier, vol. 28(12), pages 2341-2366, December.
  13. Roger E.A. Farmer, 1996. "Money In A Real Business Cycle Model," UCLA Economics Working Papers 757, UCLA Department of Economics.
  14. Roger E.A. Farmer & Jang Ting Guo, 1992. "Real Business Cycles and the Animal Spirits Hypothesis," UCLA Economics Working Papers 680, UCLA Department of Economics.
  15. Perli, Roberto, 1998. "Indeterminacy, home production, and the business cycle: A calibrated analysis," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 105-125, February.
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