Are rational explosive solutions learnable?

Pei Kuang and Yao Yao

Economics Letters, 2017, vol. 157, issue C, 62-66

Abstract: It is commonly believed that rational explosive solutions are unstable or fragile under adaptive learning. Contrary to this belief, the paper shows that under realistic parameterizations, rational explosive solutions are both E-stable and strongly E-stable in a class of models with lagged endogenous variables. It also establishes the convergence of least squares learning process to explosive solutions. Taking a simple Cagan model of inflation as an application, the paper shows that money supply feedback rule gives rise to a rational explosive solution for prices which is learnable in real time. This provides a new potential explanation for historical high inflation. Finally, E-stability results for non-MSV explosive solutions are provided.

Keywords: Money supply; Learnability; Inflation; E-stability (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 E52 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:157:y:2017:i:c:p:62-66

DOI: 10.1016/j.econlet.2017.05.038

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