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Are rational explosive solutions learnable?

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  • Kuang, Pei
  • Yao, Yao

Abstract

It is commonly believed that rational explosive solutions are unstable or fragile under adaptive learning. Contrary to this belief, the paper shows that under realistic parameterizations, rational explosive solutions are both E-stable and strongly E-stable in a class of models with lagged endogenous variables. It also establishes the convergence of least squares learning process to explosive solutions. Taking a simple Cagan model of inflation as an application, the paper shows that money supply feedback rule gives rise to a rational explosive solution for prices which is learnable in real time. This provides a new potential explanation for historical high inflation. Finally, E-stability results for non-MSV explosive solutions are provided.

Suggested Citation

  • Kuang, Pei & Yao, Yao, 2017. "Are rational explosive solutions learnable?," Economics Letters, Elsevier, vol. 157(C), pages 62-66.
    • Handle: RePEc:eee:ecolet:v:157:y:2017:i:c:p:62-66
    DOI: 10.1016/j.econlet.2017.05.038
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    References listed on IDEAS

    as
    1. Klaus Adam & Pei Kuang & Albert Marcet, 2012. "House Price Booms and the Current Account," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 77-122.
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    3. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
    4. William A. Branch & George W. Evans, 2011. "Learning about Risk and Return: A Simple Model of Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(3), pages 159-191, July.
    5. Kuang, Pei, 2014. "A model of housing and credit cycles with imperfect market knowledge," European Economic Review, Elsevier, vol. 70(C), pages 419-437.
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    7. Evans, George W. & Honkapohja, Seppo, 1994. "Convergence of least squares learning to a non-stationary equilibrium," Economics Letters, Elsevier, vol. 46(2), pages 131-136, October.
    8. Evans, George W & Honkapohja, Seppo, 1992. "On the Robustness of Bubbles in Linear RE Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 1-14, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Money supply; Learnability; Inflation; E-stability;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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