Coherence without Rationality at the Zero Lower Bound

Guido Ascari, Sophocles Mavroeidis and Nigel McClung

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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 is 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.

Date: 2022-08, Revised 2023-10
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Journal Article: Coherence without rationality at the zero lower bound (2023)
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