Adaptive learning and multiple equilibria in a natural rate monetary model with unemployment persistence

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Adaptive learning and multiple equilibria in a natural rate monetary model with unemployment persistence

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Anssi Rantala (Pellervo Economic Research Institute)

Abstract

This paper demonstrates that the adaptive learning approach to modelling private sector expectations can be used as an equilibriumselection mechanism in a natural-rate monetary model with unemployment persistence. In particular, it is shown that only one of the two rational expectations equilibria is stable under least-squares learning, and that it is always the low-inflation equilibrium with intuitive comparative statics properties that is the learnable equilibrium. Hence, this paper provides a basic theoretical justification for focusing on the low-inflation equilibrium. Earlier contributions, in which the high- inflation equilibrium was ignored, mainly because of its unpleasant characteristics, are not theoretically satisfactory.

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Paper provided by EconWPA in its series GE, Growth, Math methods with number 0404005.

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Date of creation: 27 Apr 2004
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Handle: RePEc:wpa:wuwpge:0404005

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Find related papers by JEL classification:
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-05-02 (All new papers)
NEP-MON-2004-05-02 (Monetary Economics)

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