Adaptive learning and multiple equilibria in a natural rate monetary model with unemployment persistence

Anssi Rantala
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Anssi Rantala: Pellervo Economic Research Institute

GE, Growth, Math methods from EconWPA

Abstract: This paper demonstrates that the adaptive learning approach to modelling private sector expectations can be used as an equilibriumselection mechanism in a natural-rate monetary model with unemployment persistence. In particular, it is shown that only one of the two rational expectations equilibria is stable under least-squares learning, and that it is always the low-inflation equilibrium with intuitive comparative statics properties that is the learnable equilibrium. Hence, this paper provides a basic theoretical justification for focusing on the low-inflation equilibrium. Earlier contributions, in which the high- inflation equilibrium was ignored, mainly because of its unpleasant characteristics, are not theoretically satisfactory.

Keywords: adaptive learning; monetary policy; multiple equilibria; persistence (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2004-04-27
Note: Type of Document - pdf
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpge:0404005

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