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Impacts of Priors on Convergence and Escapes from Nash Inflation

  • Thomas J. Sargent

    (New York University)

  • Noah William

    (Princeton University)

Recent papers have analyzed how economies with adaptive agents may converge to and escape from self-confirming equilibria. These papers have imputed to agents a particular prior about drifting coefficients. In the context of a model of monetary policy, this paper analyzes dynamics that govern both convergence and escape under a more general class of priors for the government. We characterize how the shape of the prior influences possible cycles, convergence, and escapes. There are priors for which the E-stability condition is not enough to assure local convergence to a self-confirming equilibrium. Our analysis also isolates the source of differences in the sustainability of Ramsey inflation encountered in the analyses of Sims (1988) and Chung (1990), on the one hand, and Cho, Williams, and Sargent (2002), on the other. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2004.10.010
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 8 (2005)
Issue (Month): 2 (April)
Pages: 360-391

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Handle: RePEc:red:issued:v:8:y:2005:i:2:p:360-391
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  1. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
  2. 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.
  3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  4. Timothy Cogley & Thomas J. Sargent, 2003. "Drifts and volatilities: monetary policies and outcomes in the post WWII U.S," Working Paper 2003-25, Federal Reserve Bank of Atlanta.
  5. Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  6. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The Conquest of South American Inflation," NBER Working Papers 12606, National Bureau of Economic Research, Inc.
  7. Drew Fudenberg & David K. Levine, 1998. "Learning in Games," Levine's Working Paper Archive 2222, David K. Levine.
  8. 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.
  9. William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
  10. Bullard James, 1994. "Learning Equilibria," Journal of Economic Theory, Elsevier, vol. 64(2), pages 468-485, December.
  11. M. I. Finley, 1958. "Note," Economic History Review, Economic History Society, vol. 11(1), pages 97-97, 08.
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