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Self Confirming Equilibrium and the Lucas Critique

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  • Drew Fudenberg
  • David K Levine

Abstract

We examine the role of off-path "superstitions" in macro-economics, and show how a false belief about off-path play is the key element underlying both the Lucas Critique and the game-theoretic concept of self-confirming equilibrium. However, the impact of false beliefs in these two cases is different: In the Lucas case, a policy maker's incorrect beliefs about off-path play can lead to the adoption of mistaken policy innovation. However, the consequences of such an innovation provide evidence that the belief that motivated them was wrong. In contrast, play may never escape an undesirable self-confirming equilibrium, as the action implied by the mistaken belief does not generate data that contradicts it; escape from the self-confirming equilibrium requires that players do a sufficient amount of experimentation with off-path actions.

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Bibliographic Info

Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 843644000000000022.

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Date of creation: 05 Apr 2007
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Handle: RePEc:cla:levarc:843644000000000022

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References

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  1. Drew Fudenberg & David K. Levine, 2006. "Superstition and Rational Learning," Harvard Institute of Economic Research Working Papers 2114, Harvard - Institute of Economic Research.
  2. Ehud Kalai & Ehud Lehrer, 1990. "Rational Learning Leads to Nash Equilibrium," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 895, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. E. Dekel & D. Fudenberg, 2010. "Rational Behavior with Payoff Uncertainty," Levine's Working Paper Archive 379, David K. Levine.
  4. Eddie Dekel & Drew Fudenberg & David K Levine, 2002. "Learning to Play Bayesian Games," Levine's Working Paper Archive 625018000000000151, David K. Levine.
  5. Eddie Dekel & Drew Fudenberg & David K. Levine, . "Payoff Information and Self-Confirming Equilibrium," ELSE working papers 032, ESRC Centre on Economics Learning and Social Evolution.
  6. Drew Fudenberg & David K. Levine, 1996. "Measuring Subject’s Losses in Experimental Games," Levine's Working Paper Archive 370, David K. Levine.
  7. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," NBER Working Papers 10764, National Bureau of Economic Research, Inc.
  8. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  9. G. Noldeke & L. Samuelson, 2010. "An Evolutionary Analysis of Backward and Forward Induction," Levine's Working Paper Archive 538, David K. Levine.
  10. Alberto Alesina & George-Marios Angeletos, 2004. "Fairness and Redistribution," Levine's Bibliography 122247000000000283, UCLA Department of Economics.
  11. Fudenberg, Drew & Levine, David K, 1993. "Steady State Learning and Nash Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 61(3), pages 547-73, May.
  12. Borgers Tilman, 1994. "Weak Dominance and Approximate Common Knowledge," Journal of Economic Theory, Elsevier, Elsevier, vol. 64(1), pages 265-276, October.
  13. Benassy, Jean-Pascal, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 42(4), pages 503-23, October.
  14. Frank Hahn, 2010. "Exercises in Conjectural Equilibrium," Levine's Working Paper Archive 526, David K. Levine.
  15. Drew Fudenberg & David Kreps & David K. Levine, 1988. "On the Robustness of Equilibrium Refinements," Levine's Working Paper Archive 227, David K. Levine.
  16. Fudenberg, Drew & Levine, David K, 1993. "Self-Confirming Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 61(3), pages 523-45, May.
  17. Cho, In-Koo & Williams, Noah & Sargent, Thomas J, 2002. "Escaping Nash Inflation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 69(1), pages 1-40, January.
  18. Ehud Kalai & Alejandro Neme, 1989. "The Strength of a Little Perfection," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 858, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Fudenberg, Drew & Kreps, David M., 1995. "Learning in extensive-form games I. Self-confirming equilibria," Games and Economic Behavior, Elsevier, Elsevier, vol. 8(1), pages 20-55.
  20. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, Elsevier, vol. 1(2), pages 170-190, June.
  21. William Poole, 2002. "Flation," Speech, Federal Reserve Bank of St. Louis 49, Federal Reserve Bank of St. Louis.
  22. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Cited by:
  1. Casey Rothschild & Florian Scheuer, 2012. "Redistributive Taxation in the Roy Model," NBER Working Papers 18228, National Bureau of Economic Research, Inc.
  2. Gilles Saint-Paul, 2012. "Economic Science and Political Influence," PSE Working Papers halshs-00759057, HAL.
  3. Ellison, Martin & Scott, Andrew, 2013. "Learning and price volatility in duopoly models of resource depletion," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(7), pages 806-820.
  4. repec:hal:wpaper:halshs-00759057 is not listed on IDEAS
  5. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, Elsevier, vol. 144(6), pages 2235-2246, November.
  6. David Levine, 2011. "Neuroeconomics?," International Review of Economics, Springer, Springer, vol. 58(3), pages 287-305, September.

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