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Rational Expectations: Observational Equivalence and Instability
[Anticipations rationnelles : Equivalence Observationnelle et Déstabilisation]

Author

Listed:
  • Jean-Bernard Chatelain

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Kirsten Ralf

    (ESCE, International Business School - ESCE)

Abstract

This paper highlights two drawbacks with respect to the current use of rational expectations in new-Keynesian dynamic stochastic general equilibrium models. The first drawback is that a rational expectation model unobservable autoregressive shocks has the same predictions for given observations than an adaptive expectations model with white noise shocks. The second drawback is related to interest rate rules responding to inflation where both inflation and interest rate are non-predetermined variables. In this case, a unique rational expectations solution implies that the parameter in the interest rate rules destabilises inflation with a positive-feedback effects. However, these inflation or deflation spirals do not show off because the autocorrelation of inflation is the one of unobservable cost-push shocks. However this destabilizing stabilization paradox disappears if one assumes that the interest rate is a predetermined variable when inflation is a non- predetermined variable. Then, the rational expectations unique solution implies a policy rule parameter which stabilizes inflation.

Suggested Citation

  • Jean-Bernard Chatelain & Kirsten Ralf, 2022. "Rational Expectations: Observational Equivalence and Instability [Anticipations rationnelles : Equivalence Observationnelle et Déstabilisation]," Post-Print halshs-03954173, HAL.
  • Handle: RePEc:hal:journl:halshs-03954173
    DOI: 10.3917/rfe.231.0057
    as

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