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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)

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    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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    File URL: http://128.118.178.162/eps/ge/papers/0404/0404005.pdf
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    Bibliographic Info

    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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    Web page: http://128.118.178.162

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    Keywords: adaptive learning; monetary policy; multiple equilibria; persistence;

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    1. Honkapohja, Seppo & Mitra, Kaushik, 2002. "Performance of monetary policy with internal central bank forecasting," Research Discussion Papers 3/2002, Bank of Finland.
    2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
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    13. Lindbeck, Assar & Snower, Dennis J, 1986. "Wage Setting, Unemployment, and Insider-Outsider Relations," American Economic Review, American Economic Association, vol. 76(2), pages 235-39, May.
    14. Evans, George W & Honkapohja, Seppo, 2003. "Adaptive Learning and Monetary Policy Design," CEPR Discussion Papers 3962, C.E.P.R. Discussion Papers.
    15. Svensson, Lars E O, 1996. "Price-level Targeting versus Inflation Targeting: A Free Lunch?," CEPR Discussion Papers 1510, C.E.P.R. Discussion Papers.
    16. William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
    17. Jensen, Henrik, 1999. "Monetary policy cooperation and multiple equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 23(8), pages 1133-1153, August.
    18. 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.
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