Adaptive learning and multiple equilibria in a natural rate monetary model with unemployment persistence

Anssi Rantala

No 30/2003, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: This paper demonstrates that the adaptive learning approach to modelling private sector expectations can be used as an equilibriumselection mechanism in a natural-rate monetary model with unemployment persistence.In particular, it is shown that only one of the two rational expectations equilibria is stable under least-squares learning, and that it is always the low-inflation equilibrium with intuitive comparative statics properties that is the learnable equilibrium.Hence, this paper provides a basic theoretical justification for focusing on the lowinflation equilibrium.Earlier contributions, in which the high-inflation equilibrium was ignored, mainly because of its unpleasant characteristics, are not theoretically satisfactory.

Keywords: adaptive learning; monetary policy; multiple equilibria; persistence (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E52 (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2003_030

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