We consider a standard two generations version of the overlapping generations model. Agents predict inflation rates on the basis of a perceived law of motion, which is estimated by running a linear regression on past inflation rates. We introduce the notion of Beliefs Equilibrium. At such an equilibrium i) the perceived law of motion is such that it fits the time series of inflation rates best, and ii) this time series of actual inflation rates is generated when agents use that perceived law of motion. We show that beliefs might converge, although inflation rates keep on fluctuating. These fluctuations are consistent with the limit belief.
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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Workshop Papers, January 2001 with number
4B.4.
Length: Date of creation: 04 Jan 2001 Date of revision: Handle: RePEc:ams:cdws01:4b.4
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