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 set up 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 to analyze learning in stochastic models.
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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number
2003/03.
Length: 42 pages Date of creation: 03 Jan 2003 Date of revision: Handle: RePEc:cfs:cfswop:wp200303
Note: Thanks go to Matthias Brückner, Marcel Jansen, Ramon Marimon, Tom Sargent, and particularly Seppo Honkapohja for helpful comments. Three anonymous referees and the editor of this journal have greatly helped me to improve the paper. The paper draws on chapter 3 of my Ph.D. thesis at the European University Institute in Florence, Italy. Errors are mine. Contact details of provider: Postal: House of Finance, Gr�neburgplatz 1, HPF H5, D-60323 Frankfurt am Main Phone: +49 (0)69 798-30050 Fax: +49 (0)69 798-30077 Email: Web page: http://www.ifk-cfs.de/ More information through EDIRC
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