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Self Confirming Equilibrium and the Lucas Critique

  • Drew Fudenberg
  • David K Levine

We examine the role of off-path “superstitions†in macro-economics, and show how a false belief about off-path play is the key element underlying both the Lucas Critique and the game-theoretic concept of self-confirming equilibrium. However, the impact of false beliefs in these two cases is different: In the Lucas case, a policy maker's incorrect beliefs about off-path play can lead to the adoption of mistaken policy innovation. However, the consequences of such an innovation provide evidence that the belief that motivated them was wrong. In contrast, play may never escape an undesirable self-confirming equilibrium, as the action implied by the mistaken belief does not generate data that contradicts it; escape from the self-confirming equilibrium requires that players do a sufficient amount of experimentation with off-path actions.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 843644000000000022.

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Date of creation: 05 Apr 2007
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Handle: RePEc:cla:levarc:843644000000000022
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  1. Hahn, Frank H, 1977. " Exercises in Conjectural Equilibria," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(2), pages 210-26.
  2. Drew Fudenberg & David K. Levine, 2006. "Superstition and Rational Learning," Harvard Institute of Economic Research Working Papers 2114, Harvard - Institute of Economic Research.
  3. Eddie Dekel & Drew Fudenberg & David K Levine, 2002. "Learning to Play Bayesian Games," Levine's Working Paper Archive 625018000000000151, David K. Levine.
  4. T. Börgers, 2010. "Weak Dominance and Approximate Common Knowledge," Levine's Working Paper Archive 378, David K. Levine.
  5. Fudenberg, Drew & Kreps, David M. & Levine, David K., 1988. "On the robustness of equilibrium refinements," Journal of Economic Theory, Elsevier, vol. 44(2), pages 354-380, April.
  6. Fudenberg, Drew & Levine, David K, 1993. "Self-Confirming Equilibrium," Econometrica, Econometric Society, vol. 61(3), pages 523-45, May.
  7. William Poole & Robert H. Rasche, 2002. "Flation," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-6.
    • William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
  8. Noldeke Georg & Samuelson Larry, 1993. "An Evolutionary Analysis of Backward and Forward Induction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 425-454, July.
  9. Ehud Kalai & Alejandro Neme, 1989. "The Strength of a Little Perfection," Discussion Papers 858, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Eddie Dekel & Drew Fudenberg & David K. Levine, . "Payoff Information and Self-Confirming Equilibrium," ELSE working papers 032, ESRC Centre on Economics Learning and Social Evolution.
  11. Thomas Sargent & Noah Williams & Tao Zha, 2006. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," American Economic Review, American Economic Association, vol. 96(4), pages 1193-1224, September.
  12. 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.
  13. Kalai, Ehud & Lehrer, Ehud, 1993. "Rational Learning Leads to Nash Equilibrium," Econometrica, Econometric Society, vol. 61(5), pages 1019-45, September.
  14. Benassy Jean-pascal, 1974. "Neokeynesian disequilibrium theory in a monetary economy," CEPREMAP Working Papers (Couverture Orange) 7402, CEPREMAP.
  15. Drew Fudenberg & David K. Levine, 1993. "Steady State Learning and Nash Equilibrium," Levine's Working Paper Archive 373, David K. Levine.
  16. Alberto Alesina & George-Marios Angeletos, 2004. "Fairness and Redistribution," NajEcon Working Paper Reviews 122247000000000306,
  17. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
  18. Drew Fudenberg & David K. Levine, 1996. "Measuring Subject’s Losses in Experimental Games," Levine's Working Paper Archive 370, David K. Levine.
  19. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  20. Dekel, Eddie & Fudenberg, Drew, 1990. "Rational behavior with payoff uncertainty," Journal of Economic Theory, Elsevier, vol. 52(2), pages 243-267, December.
  21. Fudenberg, Drew & Kreps, David M., 1995. "Learning in extensive-form games I. Self-confirming equilibria," Games and Economic Behavior, Elsevier, vol. 8(1), pages 20-55.
  22. 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.
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