Coherence without rationality at the zero lower bound

Guido Ascari, Sophocles Mavroeidis and Nigel McClung

Journal of Economic Theory, 2023, vol. 214, issue C

Abstract: Standard rational expectations models with an occasionally binding zero lower bound constraint either admit no solutions (incoherence) or multiple solutions (incompleteness). This paper shows that deviations from full-information rational expectations mitigate concerns about incoherence and incompleteness. Models with no rational expectations equilibria admit self-confirming equilibria involving the use of simple mis-specified forecasting models. Completeness and coherence are restored if expectations are adaptive or if agents are less forward-looking due to some information or behavioral friction. In the case of incompleteness, the E-stability criterion selects an equilibrium.

Keywords: Incompleteness; Incoherence; Expectations; Zero lower bound (search for similar items in EconPapers)
JEL-codes: C62 E4 E52 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:214:y:2023:i:c:s0022053123001412

DOI: 10.1016/j.jet.2023.105745

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