Journal Article

Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices

Klaus Adam

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 70, issue 4, pages 887-907
Published in print October 2003 | ISSN: 0034-6527
Published online October 2003 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/1467-937X.00271
Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices

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  • Information, Knowledge, and Uncertainy
  • General Aggregative Models
  • Intertemporal Choice and Growth
  • Prices, Business Fluctuations, and Cycles

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We study adaptive learning in a monetary overlapping generations model with sticky prices and monopolistic competition for the case where learning agents observe current endogenous variables. Observability of current variables is essential for informational consistency of the learning setup with the model setup but generates multiple temporary equilibria when prices are flexible and prevents a straightforward construction of the learning dynamics. Sticky prices overcome this problem by avoiding simultaneity between prices and price expectations. Adaptive learning then robustly selects the determinate (monetary) steady state independent from the degree of imperfect competition. The indeterminate (non-monetary) steady state and non-stationary equilibria are never stable. Stability in a deterministic version of the model may differ because perfect foresight equilibria can be the limit of restricted perceptions equilibria of the stochastic economy with vanishing noise and thereby inherit different stability properties. This discontinuity at the zero variance of shocks suggests one should analyse learning in stochastic models.

Keywords: D83; D91; E13; E30

Journal Article.  8440 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; General Aggregative Models ; Intertemporal Choice and Growth ; Prices, Business Fluctuations, and Cycles

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