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Equilibrium selection, observability and backward-stable solutions

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  • Evans, George W
  • McGough, Bruce

Abstract

The robustness of stability under learning to observability of exogenous shocks is examined. Regardless of observability assumptions, the minimal state variable solution is robustly stable under learning provided the expectational feedback is not both positive and large, while the nonfundamental solution is never robustly stable. Overlapping generations and New Keynesian models are considered and concerns raised in Cochrane (2011, 2017) are addressed.

Suggested Citation

  • Evans, George W & McGough, Bruce, 2018. "Equilibrium selection, observability and backward-stable solutions," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 1-10.
  • Handle: RePEc:eee:moneco:v:98:y:2018:i:c:p:1-10
    DOI: 10.1016/j.jmoneco.2018.04.004
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    References listed on IDEAS

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    Cited by:

    1. Mariana Garcıa-Schmidt & Michael Woodford, "undated". "Are Low Interest Rates Deflationary? A Paradox of Perfect- Foresight Analysis," Working Papers Series 18, Institute for New Economic Thinking.
    2. repec:aea:aecrev:v:109:y:2019:i:1:p:86-120 is not listed on IDEAS

    More about this item

    Keywords

    Expectations; Learning; Observability; New Keynesian;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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