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Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices

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  • Klaus Adam

Abstract

We study adaptive learning in a monetary overlapping generations model with sticky prices and monopolistic competition for the case where learning agents observe current endogenous variables. Observability of current variables is essential for informational consistency of the learning setup with the model setup but generates multiple temporary equilibria when prices are flexible and prevents a straightforward construction of the learning dynamics. Sticky prices overcome this problem by avoiding simultaneity between prices and price expectations. Adaptive learning then robustly selects the determinate (monetary) steady state independent from the degree of imperfect competition. The indeterminate (non-monetary) steady state and non-stationary equilibria are never stable. Stability in a deterministic version of the model may differ because perfect foresight equilibria can be the limit of restricted perceptions equilibria of the stochastic economy with vanishing noise and thereby inherit different stability properties. This discontinuity at the zero variance of shocks suggests one should analyse learning in stochastic models. Copyright 2003, Wiley-Blackwell.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 70 (2003)
Issue (Month): 4 ()
Pages: 887-907

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Handle: RePEc:oup:restud:v:70:y:2003:i:4:p:887-907

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  1. Duffy John, 1994. "On Learning and the Nonuniqueness of Equilibrium in an Overlapping Generations Model with Fiat Money," Journal of Economic Theory, Elsevier, Elsevier, vol. 64(2), pages 541-553, December.
  2. Lettau, Martin & Van Zandt, Timothy, 2001. "Robustness of Adaptive Expectations as an Equilibrium Selection Device," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2882, C.E.P.R. Discussion Papers.
  3. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, Elsevier, vol. 48(2), pages 337-368, August.
  4. Klaus Adam, 2002. "Adaptive Learning and Cyclical Behavior of Output and Inflation," Macroeconomics, EconWPA 0211013, EconWPA.
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Cited by:
  1. Ellison, Martin & Pearlman, Joseph, 2011. "Saddlepath learning," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(4), pages 1500-1519, July.
  2. Seonghoon Cho & Antonio Moreno, 2006. "Expectational Stability in Multivariate Models," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 06/08, School of Economics and Business Administration, University of Navarra.
  3. Klaus Adam & Albert Marcet & Juan Pablo Nicolini, 2011. "Stock Market Volatility and Learning," CEP Discussion Papers, Centre for Economic Performance, LSE dp1077, Centre for Economic Performance, LSE.
  4. McCallum, Bennett T., 2007. "E-stability vis-a-vis determinacy results for a broad class of linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(4), pages 1376-1391, April.
  5. Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(520), pages 603-636, 04.
  6. Adam, Klaus & Evans, George W. & Honkapohja, Seppo, 2003. "Are stationary hyperinflation paths learnable?," CFS Working Paper Series, Center for Financial Studies (CFS) 2004/15, Center for Financial Studies (CFS).
  7. Adam, Klaus & Evans, George W. & Honkapohja, Seppo, 2006. "Are hyperinflation paths learnable?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(12), pages 2725-2748, December.
  8. Jordi Gal?, 2014. "Monetary Policy and Rational Asset Price Bubbles," American Economic Review, American Economic Association, American Economic Association, vol. 104(3), pages 721-52, March.
  9. Klaus Adam & Albert Marcet, 2011. "Internal Rationality, Imperfect Market Knowledge and Asset Prices," CEP Discussion Papers, Centre for Economic Performance, LSE dp1068, Centre for Economic Performance, LSE.

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