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Stability and Equilibrium Selection in Learning Models: A Note of Caution

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Abstract

Relative to rational expectations models, learning models provide a theory of expectation formation where agents use observed data and a learning rule. Given the possibility of multiple equilibria under rational expectations, the learning literature often uses stability as a criterion to select an equilibrium. This article uses a monetary economy to illustrate that equilibrium selection based on stability is sensitive to specifications of the learning rule. The stability criterion selects qualitatively different equilibria even when the differences in learning specifications are small.

Suggested Citation

  • YiLi Chien & In-Koo Cho & B. Ravikumar, 2021. "Stability and Equilibrium Selection in Learning Models: A Note of Caution," Review, Federal Reserve Bank of St. Louis, vol. 103(4), pages 477-488, October.
    • Handle: RePEc:fip:fedlrv:93188
    DOI: 10.20955/r.103.477-88
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    References listed on IDEAS

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    1. Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages 401-426, October.
    2. YiLi Chien & In-Koo Cho & B. Ravikumar, 2021. "Convergence to Rational Expectations in Learning Models: A Note of Caution," Review, Federal Reserve Bank of St. Louis, vol. 103(3), pages 351-366, July.
    3. George W. Evans, 2001. "Expectations in Macroeconomics. Adaptive versus Eductive Learning," Revue Économique, Programme National Persée, vol. 52(3), pages 573-582.
    4. Barnett,William A. & Geweke,John & Shell,Karl (ed.), 1989. "Economic Complexity: Chaos, Sunspots, Bubbles, and Nonlinearity," Cambridge Books, Cambridge University Press, number 9780521355636.
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    More about this item

    Keywords

    learning models; stability; equilibrium selection;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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