Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices

Klaus Adam ()

No 2003/03, CFS Working Paper Series from Center for Financial Studies

Abstract: We study adaptive learning in a monetary overlapping generations model with sticky prices and monopolistic competition for the case where learning agents observe current endogenous variables. Observability of current variables is essential for informational consistency of the learning setup with the model set up but generates multiple temporary equilibria when prices are flexible and prevents a straightforward construction of the learning dynamics. Sticky prices overcome this problem by avoiding simultaneity between prices and price expectations. Adaptive learning then robustly selects the determinate (monetary) steady state independent from the degree of imperfect competition. The indeterminate (non-monetary) steady state and non-stationary equilibria are never stable. Stability in a deterministic version of the model may differ because perfect foresight equilibria can be the limit of restricted perceptions equilibria of the stochastic economy with vanishing noise and thereby inherit different stability properties. This discontinuity at the zero variance of shocks suggests to analyze learning in stochastic models.

Keywords: adaptive learning; sticky prices; temporary equilibrium (search for similar items in EconPapers)
JEL-codes: E31 D84 C62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2003-01-03
Note: Thanks go to Matthias Brückner, Marcel Jansen, Ramon Marimon, Tom Sargent, and particularly Seppo Honkapohja for helpful comments. Three anonymous referees and the editor of this journal have greatly helped me to improve the paper. The paper draws on chapter 3 of my Ph.D. thesis at the European University Institute in Florence, Italy. Errors are mine.
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Journal Article: Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices (2003)
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