Endogenously (non-)Ricardian beliefs
William A. Branch and
No 03/2019, ECON WPS - Working Papers in Economic Theory and Policy from TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit
This paper develops a theory of endogenously (non-)Ricardian beliefs. That is, whether Ricardian Equivalence holds in an equilibrium depends on endogenous private sector beliefs. The novelty here is a restricted perceptions viewpoint: in complex forecasting environments, agents forecast aggregate variables with (potentially) misspecified models that are optimal within the restricted class, i.e., a restricted perceptions equilibrium (RPE). A misspecification equilibrium is a refinement of an RPE where the choice of restricted models is endogenous. Our formalization considers two predictors: in one rule Ricardian beliefs emerge as a self-confirming equilibrium, while the other features an equilibrium with non-Ricardian beliefs. We show that (1.) there can exist misspecification equilibria where beliefs are endogenously (non-)Ricardian, (2.) multiple equilibria exist where the economy can coordinate on Ricardian or non-Ricardian equilibria. The theory suggests a novel interpretation of post-war U.S. inflation data as being generated by endogenous belief-driven regime change and a nuanced trade-off for monetary policy rules.
Keywords: adaptive learning; misspecification; heterogeneous beliefs; fiscal theory of price level (search for similar items in EconPapers)
JEL-codes: D82 D83 E40 E50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuweco:032019
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