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On Learning Equilibria

  • Florian Wagener
  • Jan Tuinstra

We investigate an inflationary overlapping generations model where households predict future inflation rates by running a least squares regression of inflation rates or prices on their past levels. We critically examine the results on learning equilibria obtained by Bullard (1994) and Schönhofer (1999) in this framework. They show that an increase in the money growth rate may lead to limit cycles and endogenous business cycles. We suggest an alternative estimation procedure, that starts from the same perceived law of motion, but is more sensible from an econometrician's point of view. We prove that for this estimation procedure there is global convergence on the monetary steady for a large set of savings functions. We also study, in a heterogeneous agents framework, evolutionary competition between the two estimation procedures, where the fraction of the population using a certain estimation procedure is determined by its past average quadratic forecast error. Interestingly, the more sensible estimation procedure is not always able to drive out the other estimation procedure, and endogenous business cycles may still be observed in this heterogeneous world

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 217.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:217
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  1. Hommes, Cars & Sorger, Gerhard, 1998. "Consistent Expectations Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 287-321, September.
  2. repec:cup:macdyn:v:2:y:1998:i:3:p:287-321 is not listed on IDEAS
  3. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  4. repec:att:wimass:9530 is not listed on IDEAS
  5. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  6. Jan Wenzelburger, 2000. "Convergence of Adaptive Learning Models of Pure Exchange," Econometric Society World Congress 2000 Contributed Papers 1070, Econometric Society.
  7. Tuinstra, Jan, 2003. "Beliefs equilibria in an overlapping generations model," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 145-164, February.
  8. Bullard James, 1994. "Learning Equilibria," Journal of Economic Theory, Elsevier, vol. 64(2), pages 468-485, December.
  9. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  10. Duffy John, 1994. "On Learning and the Nonuniqueness of Equilibrium in an Overlapping Generations Model with Fiat Money," Journal of Economic Theory, Elsevier, vol. 64(2), pages 541-553, December.
  11. Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages S401-26, October.
  12. Sonnenschein, Hugo, 1973. "Do Walras' identity and continuity characterize the class of community excess demand functions?," Journal of Economic Theory, Elsevier, vol. 6(4), pages 345-354, August.
  13. Jan Tuinstra & Florian Wagener, 2007. "On learning equilibria," Economic Theory, Springer, vol. 30(3), pages 493-513, March.
  14. 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.
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