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Self-confirming Equilibrium and the Lucas Critique

  • Fudenberg, Drew
  • Levine, David K.

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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File URL: http://dash.harvard.edu/bitstream/handle/1/4686412/Fudenberg_LucasCritique.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 4686412.

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Date of creation: 2009
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Publication status: Published in Journal of Economic Theory
Handle: RePEc:hrv:faseco:4686412
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  1. Drew Fudenberg & Eddie Dekel, 1987. "Rational Behavior with Payoff Uncertainty," Working papers 471, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," NBER Working Papers 10764, National Bureau of Economic Research, Inc.
  3. Benassy Jean-pascal, 1974. "Neokeynesian disequilibrium theory in a monetary economy," CEPREMAP Working Papers (Couverture Orange) 7402, CEPREMAP.
  4. Fudenberg, Drew & Levine, David K, 1993. "Self-Confirming Equilibrium," Econometrica, Econometric Society, vol. 61(3), pages 523-45, May.
  5. Dekel, E. & Fudenberg, D. & Levine, D.K., 1999. "Payoff information and Self-Confirming Equilibrium," Papers 9-99, Tel Aviv.
  6. 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.
  7. Frank Hahn, 2010. "Exercises in Conjectural Equilibrium," Levine's Working Paper Archive 526, David K. Levine.
  8. Dekel, Eddie & Fudenberg, Drew & Levine, David K., 2004. "Learning to play Bayesian games," Games and Economic Behavior, Elsevier, vol. 46(2), pages 282-303, February.
  9. E. Kalai & E. Lehrer, 2010. "Rational Learning Leads to Nash Equilibrium," Levine's Working Paper Archive 529, David K. Levine.
  10. 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.
  11. 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.
  12. Borgers Tilman, 1994. "Weak Dominance and Approximate Common Knowledge," Journal of Economic Theory, Elsevier, vol. 64(1), pages 265-276, October.
  13. Alberto Alesina & George-Marios Angeletos, 2004. "Fairness and Redistribution," Levine's Bibliography 122247000000000283, UCLA Department of Economics.
  14. Levine, David & Kreps, David & Fudenberg, Drew, 1988. "On the Robustness of Equilibrium Refinements," Scholarly Articles 3350444, Harvard University Department of Economics.
  15. Levine, David & Fudenberg, Drew, 2006. "Superstition and Rational Learning," Scholarly Articles 3196330, Harvard University Department of Economics.
  16. 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.
  17. 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.
  18. Cho, In-Koo & Sargent, Thomas J., 2000. "Escaping Nash inflation," Working Paper Series 0023, European Central Bank.
  19. Drew Fudenberg & David K. Levine, 1996. "Measuring Subject’s Losses in Experimental Games," Levine's Working Paper Archive 370, David K. Levine.
  20. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
  21. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  22. Fudenberg, Drew & Levine, David K, 1993. "Steady State Learning and Nash Equilibrium," Econometrica, Econometric Society, vol. 61(3), pages 547-73, May.
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