Robustness of Adaptive Expectations as an Equilibrium Selection Device

Timothy Van Zandt () and Martin Lettau

No 2882, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Dynamic models in which agents' behaviour depends on expectations of future prices or other endogenous variables can have steady states that are stationary equilibria for a wide variety of expectations rules, including rational expectations. When there are multiple steady states, stability is a criterion for selecting predictions of long-run outcomes among them. The purpose of this Paper is to study how sensitive stability is to certain details of the expectations rules, in a simple OLG model with constant government debt that is financed through seigniorage. We compare simple recursive learning rules, learning rules with vanishing gain, and OLS learning, and also relate these to expectational stability. One finding is that two adaptive expectation rules that differ only in whether they use current information can have opposite stability properties.

Keywords: inflation; Adaptive expectations; Stability (search for similar items in EconPapers)
JEL-codes: D84 E31 (search for similar items in EconPapers)
Date: 2001-07
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: ROBUSTNESS OF ADAPTIVE EXPECTATIONS AS AN EQUILIBRIUM SELECTION DEVICE (2003)
Working Paper: Robustness of Adaptive Expections as an Equilibrium Selection Device (1995)
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