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Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky

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Author Info
Klaus Adam () (European University Institute, Fondazione CARISAL and CSEF, Università di Salerno)

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Abstract

PricesThis paper studies the properties of adaptive learning as a device to select amongst the rational expectations equilibria of a monetary overlapping generations model. It extends previous contributions by introducing monopolistic competition and improves upon them by analyzing learning in a model with a well-defined temporary equilibrium map, a coherent informational setup, and properly specified microfoundations. The main result is that adaptive learning is a robust selection mechanism that independent from the degree of imperfect competition always selects the same equilibrium. The indeterminate steady state and the non-stationary equilibria are never stable. The determinate low inflation steady state is the unique stable equilibrium; however, depending on how agents forecast, stability is found to be related to observable characteristics of the economy.

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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 69.

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Date of creation: 01 Sep 2001
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Publication status: Published in Review of Economic Studies, 2003, vol. 70, pages 887-908
Handle: RePEc:sef:csefwp:69

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Related research
Keywords: adaptive learning; equilibrium selection; rational expectations; indeterminacy; stability;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Duffy John, 1994. "On Learning and the Nonuniqueness of Equilibrium in an Overlapping Generations Model with Fiat Money," Journal of Economic Theory, Elsevier, vol. 64(2), pages 541-553, December. [Downloadable!] (restricted)
  2. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October. [Downloadable!] (restricted)
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  3. Marimon, Ramon & Sunder, Shyam, 1993. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica, Econometric Society, vol. 61(5), pages 1073-107, September. [Downloadable!] (restricted)
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  4. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August. [Downloadable!] (restricted)
  5. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  6. Lettau, Martin & Van Zandt, Timothy, 2001. "Robustness of Adaptive Expectations as an Equilibrium Selection Device," CEPR Discussion Papers 2882, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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