Consistent Expectations, Rational Expectations, Multiple-Solution Indeterminacies, and Least-Squares Learnability
After some historical discussion of the rational expectations (RE) solution procedures of John Muth, Alan Walters, and Robert Lucas, this paper considers the relevance for actual economies of issues stemming from the existence of multiple RE equilibria. In all linear models, the minimum state variable (MSV) solution as defined by the author (JME, 1983) is unique by construction. While it might be argued that the MSV solution warrants special status as the bubble-free solution, the focus in this paper is on its adaptive, least-squares learnability by individual agents, as discussed extensively in important recent publications by George Evans and Seppo Honkapohja. Although the MSV solution is learnable and the main alternatives are not, in most standard models, Evans and Honkapohja have stressed an example in which the opposite is true. The present paper shows, however, that parameter values yielding that result are such that the model is not well formulated, in a specified sense (one that avoids implausible discontinuities). More generally, analysis of a pair of prominent univariate specifications, featured by Evans and Honkapohja, shows that the MSV solution is invariably learnable in these structures, if they are well formulated.
|Date of creation:||Sep 2002|
|Date of revision:|
|Publication status:||published as Minford, Patrick (ed.) Money Matters: Essays in Honour of Alan Walters. Edward Elgar Publishing, 2004.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ann-Charlotte Eliasson & Peter Isard & Douglas Laxton, 1999.
"Simple Monetary Policy Rules Under Model Uncertainty,"
IMF Working Papers
99/75, International Monetary Fund.
- Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," International Tax and Public Finance, Springer, vol. 6(4), pages 537-577, November.
- Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," Computing in Economics and Finance 1999 841, Society for Computational Economics.
- Stephanie Schmitt-Grohe & Martin Uribe, 2000.
"Liquidity Traps with Global Taylor Rules,"
Departmental Working Papers
200014, Rutgers University, Department of Economics.
- Ben S. Bernanke & Michael Woodford, 1997.
"Inflation Forecasts and Monetary Policy,"
NBER Working Papers
6157, National Bureau of Economic Research, Inc.
- Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
- Ben S. Bernanke & Michael Woodford, 1997. "Inflation forecasts and monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 653-686.
- Benhabib, Jess & Schmitt-Grohe, Stephanie & Uribe, Martin, 1998.
"The Perils of Taylor Rules,"
98-37, C.V. Starr Center for Applied Economics, New York University.
- Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 1998. "The perils of Taylor Rules," Departmental Working Papers 199831, Rutgers University, Department of Economics.
- Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "The Perils of Taylor Rules," CEPR Discussion Papers 2314, C.E.P.R. Discussion Papers.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
Journal of Economic Literature,
American Economic Association, vol. 37(4), pages 1661-1707, December.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
- Kaushik Mitra & James Bullard, .
"Learning About Monetary Policy Rules,"
00/41, Department of Economics, University of York.
- Brayton, Flint & Levin, Andrew & Lyon, Ralph & Williams, John C., 1997. "The evolution of macro models at the Federal Reserve Board," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 43-81, December.
- Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-25, August.
- Ragna Alstadheim & Dale W. Henderson, 2004.
"Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps,"
International Finance Discussion Papers
795, Board of Governors of the Federal Reserve System (U.S.).
- Alstadheim Ragna & Henderson Dale W., 2006. "Price-Level Determinacy, Lower Bounds on the Nominal Interest Rate, and Liquidity Traps," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-27, November.
- Ragna Alstadheim & Dale Henderson, 2006. "Price-level determinacy, lower bounds on the nominal interest rate, and liquidity traps," Working Paper 2006/03, Norges Bank.
- John H. Cochrane, 1998.
"A Frictionless View of U.S. Inflation,"
CRSP working papers
479, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- George Evans, 1985. "Expectational Stability and the Multiple Equilibria Problem in Linear Rational Expectations Models," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1217-1233.
- Gauthier, St phane, 2003.
"Dynamic Equivalence Principle In Linear Rational Expectations Models,"
Cambridge University Press, vol. 7(01), pages 63-88, February.
- Stéphane Gauthier, 2003. "Dynamic equivalence principle in linear rational expectations models," Post-Print halshs-00069499, HAL.
- Narayana R. Kocherlakota & Christopher Phelan, 1999. "Explaining the fiscal theory of the price level," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-23.
- Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- Evans, George W & Honkapohja, Seppo, 1992. "On the Robustness of Bubbles in Linear RE Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 1-14, February.
- Bennett T. McCallum, 1980.
"Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations,"
NBER Working Papers
0559, National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
- Wenzelburger, Jan, 2006. "Learning in linear models with expectational leads," Journal of Mathematical Economics, Elsevier, vol. 42(7-8), pages 854-884, November.
- 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.
- Michael Woodford, 1994. "Nonstandard Indicators for Monetary Policy: Can Their Usefulness Be Judged from Forecasting Regressions?," NBER Chapters, in: Monetary Policy, pages 95-115 National Bureau of Economic Research, Inc.
- repec:cup:macdyn:v:7:y:2003:i:1:p:63-88 is not listed on IDEAS
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-99.
- Flood, Robert P & Garber, Peter M, 1980. "An Economic Theory of Monetary Reform," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 24-58, February.
- Walters, A A, 1971. "Consistent Expectations, Distributed Lags and the Quantity Theory," Economic Journal, Royal Economic Society, vol. 81(322), pages 273-81, June.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9218. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.