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Escaping Nash Inflation

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

Abstract

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 selfconfirming 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.“If an unlikely event occurs, it is very likely to occur in the most likly way.”Michael Harrison Copyright 2002, Wiley-Blackwell.

Suggested Citation

  • In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002. "Escaping Nash Inflation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 1-40.
    • Handle: RePEc:oup:restud:v:69:y:2002:i:1:p:1-40
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00196
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