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Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices

  • Klaus Adam

We study adaptive learning in a monetary overlapping generations model with sticky prices and monopolistic competition for the case where learning agents observe current endogenous variables. Observability of current variables is essential for informational consistency of the learning setup with the model setup but generates multiple temporary equilibria when prices are flexible and prevents a straightforward construction of the learning dynamics. Sticky prices overcome this problem by avoiding simultaneity between prices and price expectations. Adaptive learning then robustly selects the determinate (monetary) steady state independent from the degree of imperfect competition. The indeterminate (non-monetary) steady state and non-stationary equilibria are never stable. Stability in a deterministic version of the model may differ because perfect foresight equilibria can be the limit of restricted perceptions equilibria of the stochastic economy with vanishing noise and thereby inherit different stability properties. This discontinuity at the zero variance of shocks suggests one should analyse learning in stochastic models. Copyright 2003, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/1467-937X.00271
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 70 (2003)
Issue (Month): 4 ()
Pages: 887-907

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Handle: RePEc:oup:restud:v:70:y:2003:i:4:p:887-907
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  1. Lettau, M. & Van Zandt, T., 1995. "Robustness of Adaptive Expections as an Equilibrium Selection Device," Papers 9598, Tilburg - Center for Economic Research.
  2. 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.
  3. Duffy John, 1994. "On Learning and the Nonuniqueness of Equilibrium in an Overlapping Generations Model with Fiat Money," Journal of Economic Theory, Elsevier, vol. 64(2), pages 541-553, December.
  4. Klaus Adam, 2002. "Adaptive Learning and Cyclical Behavior of Output and Inflation," Macroeconomics 0211013, EconWPA.
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