Coherence without Rationality at the ZLB

Guido Ascari, Sophocles Mavroeidis and Nigel McClung

No 212, DEM Working Papers Series from University of Pavia, Department of Economics and Management

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.

Keywords: incompleteness; incoherence; expectations; zero lower bound (search for similar items in EconPapers)
JEL-codes: C62 E4 E52 (search for similar items in EconPapers)
Pages: 72
Date: 2023-07
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