Escaping Nash Inflation
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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Volume (Year): 69 (2002)
Issue (Month): 1 (January)
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