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On learning equilibria

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  • Jan Tuinstra
  • Florian Wagener

Abstract

We investigate an inflationary overlapping generations model where households predict future inflation rates by running a least squares regression of inflation rates or prices on their past levels. We critically examine the results on learning equilibria obtained by Bullard (1994) and Schönhofer (1999) in this framework. They show that an increase in the money growth rate may lead to limit cycles and endogenous business cycles. We suggest an alternative estimation procedure, that starts from the same perceived law of motion, but is more sensible from an econometrician's point of view. We prove that for this estimation procedure there is global convergence on the monetary steady for a large set of savings functions. We also study, in a heterogeneou agents framework, evolutionary competition between the two estimation procedures, where the fraction of the population using a certain estimation procedure is determined by its past average quadratic forecast error. Interestingly, the more sensible estimation procedure is not always able to drive out the other estimation procedure, and endogenous business cycles may still be observed in this heterogeneous world.
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Suggested Citation

  • Jan Tuinstra & Florian Wagener, 2007. "On learning equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(3), pages 493-513, March.
    • Handle: RePEc:spr:joecth:v:30:y:2007:i:3:p:493-513
    DOI: 10.1007/s00199-005-0059-1
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    More about this item

    Keywords

    Overlapping generations models; Learning; Endogenous business cycles; Heterogeneous beliefs; Evolutionary dynamics; D83; D84; D90; E31; E32;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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