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Self-confirming Equilibrium and the Lucas Critique

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  • Fudenberg, Drew
  • Levine, David K.

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 Harvard University Department of Economics in its series Scholarly Articles with number 4686412.

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Date of creation: 2009
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Publication status: Published in Journal of Economic Theory
Handle: RePEc:hrv:faseco:4686412

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  1. Levine, David & Fudenberg, Drew, 2006. "Superstition and Rational Learning," Scholarly Articles 3196330, Harvard University Department of Economics.
  2. Drew Fudenberg & David K. Levine, 1993. "Steady State Learning and Nash Equilibrium," Levine's Working Paper Archive 373, David K. Levine.
  3. Dekel, Eddie & Fudenberg, Drew & Levine, David K., 1999. "Payoff Information and Self-Confirming Equilibrium," Journal of Economic Theory, Elsevier, vol. 89(2), pages 165-185, December.
  4. Noldeke Georg & Samuelson Larry, 1993. "An Evolutionary Analysis of Backward and Forward Induction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 425-454, July.
  5. Drew Fudenberg & Eddie Dekel, 1987. "Rational Behavior with Payoff Uncertainty," Working papers 471, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. E. Kalai & E. Lehrer, 2010. "Rational Learning Leads to Nash Equilibrium," Levine's Working Paper Archive 529, David K. Levine.
  7. William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
  8. Eddie Dekel & Drew Fudenberg & David K. Levine, 2000. "Learning to Play Bayesian Games," Discussion Papers 1322, Northwestern University, Center for Mathematical Studies in Economics and Management Science, revised Jul 2001.
  9. Benassy Jean-pascal, 1974. "Neokeynesian disequilibrium theory in a monetary economy," CEPREMAP Working Papers (Couverture Orange) 7402, CEPREMAP.
  10. Drew Fudenberg & David K. Levine, 1996. "Measuring Subject’s Losses in Experimental Games," Levine's Working Paper Archive 370, David K. Levine.
  11. Fudenberg, Drew & Kreps, David M. & Levine, David K., 1988. "On the robustness of equilibrium refinements," Journal of Economic Theory, Elsevier, vol. 44(2), pages 354-380, April.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. 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.
  14. Fudenberg, Drew & Levine, David K, 1993. "Self-Confirming Equilibrium," Econometrica, Econometric Society, vol. 61(3), pages 523-45, May.
  15. Cho, In-Koo & Sargent, Thomas J., 2000. "Escaping Nash inflation," Working Paper Series 0023, European Central Bank.
  16. Angeletos, George-Marios & Alesina, Alberto, 2005. "Fairness and Redistribution," Scholarly Articles 4553009, Harvard University Department of Economics.
  17. Ehud Kalai & Alejandro Neme, 1989. "The Strength of a Little Perfection," Discussion Papers 858, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Frank Hahn, 2010. "Exercises in Conjectural Equilibrium," Levine's Working Paper Archive 526, David K. Levine.
  19. T. Börgers, 2010. "Weak Dominance and Approximate Common Knowledge," Levine's Working Paper Archive 378, David K. Levine.
  20. Fudenberg, Drew & Kreps, David M., 1995. "Learning in extensive-form games I. Self-confirming equilibria," Games and Economic Behavior, Elsevier, vol. 8(1), pages 20-55.
  21. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
  22. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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Cited by:
  1. Saint-Paul, Gilles, 2012. "Economic Science and Political Influence," CEPR Discussion Papers 9263, C.E.P.R. Discussion Papers.
  2. repec:hal:wpaper:halshs-00759057 is not listed on IDEAS
  3. Ellison, Martin & Scott, Andrew, 2013. "Learning and price volatility in duopoly models of resource depletion," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 806-820.
  4. David Levine, 2011. "Neuroeconomics?," International Review of Economics, Springer, vol. 58(3), pages 287-305, September.
  5. Casey Rothschild, 2013. "Redistributive Taxation in the Roy Model," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 623-668.
  6. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.

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