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Equilibrium selection, observability and backward-stable solutions

George Evans () and Bruce McGough ()

Journal of Monetary Economics, 2018, vol. 98, issue C, 1-10

Abstract: The robustness of stability under learning to observability of exogenous shocks is examined. Regardless of observability assumptions, the minimal state variable solution is robustly stable under learning provided the expectational feedback is not both positive and large, while the nonfundamental solution is never robustly stable. Overlapping generations and New Keynesian models are considered and concerns raised in Cochrane (2011, 2017) are addressed.

Keywords: Expectations; Learning; Observability; New Keynesian (search for similar items in EconPapers)
JEL-codes: D83 D84 E31 E32 E52 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jmoneco.2018.04.004

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