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Endogenously (non-)Ricardian beliefs

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  • Branch, William A.
  • Gasteiger, Emanuel

Abstract

This paper develops a theory of endogenously (non-)Ricardian beliefs. That is, whether Ricardian Equivalence holds in an equilibrium depends on endogenous private sector beliefs. The novelty here is a restricted perceptions viewpoint: in complex forecasting environments, agents forecast aggregate variables with (potentially) misspecified models that are optimal within the restricted class, i.e., a restricted perceptions equilibrium (RPE). A misspecification equilibrium is a refinement of an RPE where the choice of restricted models is endogenous. Our formalization considers two predictors: in one rule Ricardian beliefs emerge as a self-confirming equilibrium, while the other features an equilibrium with non-Ricardian beliefs. We show that (1.) there can exist misspecification equilibria where beliefs are endogenously (non-)Ricardian, (2.) multiple equilibria exist where the economy can coordinate on Ricardian or non-Ricardian equilibria. The theory suggests a novel interpretation of post-war U.S. inflation data as being generated by endogenous belief-driven regime change and a nuanced trade-off for monetary policy rules.

Suggested Citation

  • Branch, William A. & Gasteiger, Emanuel, 2019. "Endogenously (non-)Ricardian beliefs," ECON WPS - Working Papers in Economic Theory and Policy 03/2019, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
  • Handle: RePEc:zbw:tuweco:032019
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    2. Gasteiger, Emanuel & Grimaud, Alex, 2020. "Price setting frequency and the Phillips Curve," ECON WPS - Working Papers in Economic Theory and Policy 03/2020, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.

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    More about this item

    Keywords

    adaptive learning; misspecification; heterogeneous beliefs; fiscal theory of price level;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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