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Are Dynamically Inefficient Equilibria Learnable?

  • John Duffy

We consider the stability under adaptive learning dynamics of steady state equilibria in Diamond`s (1965) overlapping generations growth model with capital and money. Interior steady state equilibria of this model can be either dynamically inefficient or dynamically efficient. We show that a necessary condition for an equilibrium of this model to be stable under adaptive learning is that the equilibrium is dynamically efficient. In other words, adaptive learning can be used as a selection criterion to exclude dynamically inefficient equilibria. We also provide conditions under which a dynamically efficient equilibrium of this model involving the use of both capital and money will be stable under adaptive learning dynamics.

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Paper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 441.

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Date of creation: Jul 2011
Date of revision: Jan 2011
Handle: RePEc:pit:wpaper:441
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