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Robustness of Adaptive Expectations as an Equilibrium Selection Device

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  • Van Zandt, Timothy
  • Lettau, Martin

Abstract

Dynamic models in which agents' behaviour depends on expectations of future prices or other endogenous variables can have steady states that are stationary equilibria for a wide variety of expectations rules, including rational expectations. When there are multiple steady states, stability is a criterion for selecting predictions of long-run outcomes among them. The purpose of this Paper is to study how sensitive stability is to certain details of the expectations rules, in a simple OLG model with constant government debt that is financed through seigniorage. We compare simple recursive learning rules, learning rules with vanishing gain, and OLS learning, and also relate these to expectational stability. One finding is that two adaptive expectation rules that differ only in whether they use current information can have opposite stability properties.

Suggested Citation

  • Van Zandt, Timothy & Lettau, Martin, 2001. "Robustness of Adaptive Expectations as an Equilibrium Selection Device," CEPR Discussion Papers 2882, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2882
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    Cited by:

    1. Cellarier, Laurent L., 2008. "Least squares learning and business cycles," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 553-564, December.
    2. Tuinstra, Jan, 2003. "Beliefs equilibria in an overlapping generations model," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 145-164, February.
    3. Paolo Gelain & Kevin J. Lansing & Caterina Mendicino, 2013. "House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 219-276, June.
    4. Alonso-Carrera, Jaime, 2001. "On learning to forecast in an endogenous growth model with externalities," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1139-1156, August.
    5. Baranowski, Ryan, 2015. "Adaptive learning and monetary exchange," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 1-18.
    6. Georges, Christophre, 2003. "Adjustment costs, learning, and indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 28(1), pages 101-116, October.
    7. Li, Dong & Nagurney, Anna & Yu, Min, 2018. "Consumer learning of product quality with time delay: Insights from spatial price equilibrium models with differentiated products," Omega, Elsevier, vol. 81(C), pages 150-168.
    8. Oscar J. Arce, 2006. "Speculative Hyperinflations: When Can We Rule Them Out?," Computing in Economics and Finance 2006 376, Society for Computational Economics.
    9. Klaus Adam & George W. Evans & Seppo Honkapoja, 2003. "Are Stationary Hyperinflation Paths Learnable?," CESifo Working Paper Series 936, CESifo.
    10. Cellarier, Laurent L., 2013. "A family production overlapping generations economy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2168-2179.
    11. Shurojit Chatterji & Ignacio N. Lobato, 2010. "Transformations of the state variable and learning dynamics," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(4), pages 385-403, December.
    12. Barucci, Emilio, 2001. "Fading memory learning in a class of forward-looking models with an application to hyperinflation dynamics," Economic Modelling, Elsevier, vol. 18(2), pages 233-252, April.
    13. Driskill, Robert, 2006. "Multiple equilibria in dynamic rational expectations models: A critical review," European Economic Review, Elsevier, vol. 50(1), pages 171-210, January.
    14. Cars Hommes & Domenico Massaro & Isabelle Salle, 2019. "Monetary And Fiscal Policy Design At The Zero Lower Bound: Evidence From The Lab," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1120-1140, April.
    15. Klaus Adam, 2003. "Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(4), pages 887-907.
    16. Klaus Adam, 2001. "Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky," CSEF Working Papers 69, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    17. Adam, Klaus & Evans, George W. & Honkapohja, Seppo, 2006. "Are hyperinflation paths learnable?," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2725-2748, December.

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    More about this item

    Keywords

    inflation; Adaptive expectations; Stability;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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