Journal Article

Escaping Nash Inflation

In-Koo Cho, Noah Williams and Thomas J. Sargent

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 69, issue 1, pages 1-40
Published in print January 2002 | ISSN: 0034-6527
Published online January 2002 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00196
Escaping Nash Inflation

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An ordinary differential equation (ODE) gives the mean dynamics that govern the convergence to self-confirming equilibria of self-referential systems under discounted least squares learning. Another ODE governs escape dynamics that recurrently propel away from a selfconfirming equilibrium. In a model with a unique self-confirming equilibrium, the escape dynamics make the government discover too strong a version of the natural rate hypothesis. The escape route dynamics cause recurrent outcomes close to the Ramsey (commitment) inflation rate in a model with an adaptive government.

“If an unlikely event occurs, it is very likely to occur in the most likly way.”

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Subjects: Economics

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