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

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  • Rantala, Anssi

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 lowinflation equilibrium.Earlier contributions, in which the high-inflation equilibrium was ignored, mainly because of its unpleasant characteristics, are not theoretically satisfactory.

Suggested Citation

  • Rantala, Anssi, 2003. "Adaptive learning and multiple equilibria in a natural rate monetary model with unemployment persistence," Bank of Finland Research Discussion Papers 30/2003, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2003_030
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    More about this item

    Keywords

    adaptive learning; monetary policy; multiple equilibria; persistence;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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

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