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Coherence without Rationality at the ZLB

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  • Guido Ascari
  • Sophocles Mavroeidis
  • Nigel McClung

Abstract

Standard rational expectations models with an occasionally binding zero lower bound constraint either admit no solutions (incoherence) or multiple solutions (in- completeness). This paper shows that deviations from full-information rational ex- pectations mitigate concerns about incoherence and incompleteness. Models with no rational expectations equilibria admit self-confirming equilibria involving the use of simple mis-specified forecasting models. Completeness and coherence is restored if ex- pectations are adaptive or if agents are less forward-looking due to some information or behavioral friction. In the case of incompleteness, the E-stability criterion selects an equilibrium.

Suggested Citation

  • Guido Ascari & Sophocles Mavroeidis & Nigel McClung, 2023. "Coherence without Rationality at the ZLB," Working Papers 784, DNB.
    • Handle: RePEc:dnb:dnbwpp:784
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    References listed on IDEAS

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    More about this item

    Keywords

    incompleteness; incoherence; expectations; zero lower bound;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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