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Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?

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Abstract

Recent models of monetary policy can have indeterminacy of equilibria, which is often viewed as a di±culty of these models. We consider the significance of indeterminacy using the learning approach to expectations formation. We employ expectational stability as a selection criterion for different equilibria and derive the expectational stability and instability conditions for forward-looking multivariate models, both without and with lags. The results are applied to several monetary policies.

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Bibliographic Info

Paper provided by Department of Economics, Royal Holloway University of London in its series Royal Holloway, University of London: Discussion Papers in Economics with number 04/13.

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Length: 29 pages
Date of creation: Jul 2004
Date of revision: Jul 2004
Handle: RePEc:hol:holodi:0413

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Web page: http://www.rhul.ac.uk/economics/

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Postal: Egham Hill, Egham, Surrey, TW20 0EX, UK.
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Keywords: Adaptive learning; stability; sunspots; monetary policy;

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  3. Evans, George W. & Honkapohja, Seppo, 2003. "Existence of adaptively stable sunspot equilibria near an indeterminate steady state," Journal of Economic Theory, Elsevier, vol. 111(1), pages 125-134, July.
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  24. Evans George W. & Honkapohja Seppo, 1994. "On the Local Stability of Sunspot Equilibria under Adaptive Learning Rules," Journal of Economic Theory, Elsevier, vol. 64(1), pages 142-161, October.
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  26. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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  29. George W. Evans & Seppo Honkapohja, 2002. "Expectational Stability of Stationary Sunspot Equilibria in a Forward-looking Linear Model," University of Oregon Economics Department Working Papers 2001-9, University of Oregon Economics Department, revised 14 Jan 2002.
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