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Escaping Nash Inflation

  • Cho, In-Koo
  • Williams, Noah
  • Sargent, Thomas J

An ordinary differential equation (ODE) gives the mean dynamics that govern the convergence to self-confirming equilibria of self-referential systems under discounted least squares learning. Another ODE governs escape dynamics that recurrently propel away from a self-confirming equilibrium. In a model with a unique self-confirming equilibrium, the escape dynamics make the government discover too strong a version of the natural rate hypothesis. The escape route dynamics cause recurrent outcomes close to the Ramsey (commitment) inflation rate in a model with an adaptive government. Copyright 2002 by The Review of Economic Studies Limited

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Article provided by Wiley Blackwell in its journal Review of Economic Studies.

Volume (Year): 69 (2002)
Issue (Month): 1 (January)
Pages: 1-40

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Handle: RePEc:bla:restud:v:69:y:2002:i:1:p:1-40
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  1. Albert Marcet & Juan P. Nicolini, 1995. "Recurrent hyperinflations and learning," Economics Working Papers 244, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2001.
  2. Volker Wieland, 1996. "Learning by doing and the value of optimal experimentation," Finance and Economics Discussion Series 96-5, Board of Governors of the Federal Reserve System (U.S.).
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  11. Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics 415, Boston College Department of Economics.
  12. George W. Evans & Seppo Honkapohja, 1993. "Adaptive forecasts, hysteresis, and endogenous fluctuations," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
  13. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
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