Self-confirming Equilibrium and the Lucas Critique

Drew Fudenberg and David Levine

Scholarly Articles from Harvard University Department of Economics

Abstract: We examine the role of off-path “superstitions†in macro-economics, and show how a false belief about off-path play is the key element underlying both the Lucas Critique and the game-theoretic concept of self-confirming equilibrium. However, the impact of false beliefs in these two cases is different: In the Lucas case, a policy maker's incorrect beliefs about off-path play can lead to the adoption of mistaken policy innovation. However, the consequences of such an innovation provide evidence that the belief that motivated them was wrong. In contrast, play may never escape an undesirable self-confirming equilibrium, as the action implied by the mistaken belief does not generate data that contradicts it; escape from the self-confirming equilibrium requires that players do a sufficient amount of experimentation with off-path actions.

Date: 2009
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Citations: View citations in EconPapers (16)

Published in Journal of Economic Theory

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Related works:
Journal Article: Self-confirming equilibrium and the Lucas critique (2009)
Working Paper: Self Confirming Equilibrium and the Lucas Critique (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:4686412

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