Robustness of Adaptive Expectations as an Equilibrium Selection Device

33 Pages Posted: 1 Aug 2001

See all articles by Timothy Van Zandt

Timothy Van Zandt

INSEAD - Economics and Political Sciences; Centre for Economic Policy Research (CEPR)

Martin Lettau

University of California - Haas School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: July 2001

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

JEL Classification: D84, E31

Suggested Citation

Van Zandt, Timothy and Lettau, Martin, Robustness of Adaptive Expectations as an Equilibrium Selection Device (July 2001). CEPR Discussion Paper No. 2882. Available at SSRN: https://ssrn.com/abstract=278166

Timothy Van Zandt

INSEAD - Economics and Political Sciences ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4981 (Phone)
+33 1 6074 6192 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Martin Lettau (Contact Author)

University of California - Haas School of Business ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
5106436349 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu/lettau/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
16
Abstract Views
782
PlumX Metrics