Research Discussion Papers, Bank of Finland
Adaptive learning and multiple equilibria in a natural rate monetary model with unemployment persistence
Abstract: This paper demonstrates that the adaptive learning
approach to modelling private sector expectations can be used as an
equilibrium selection 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 low-inflation 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; (follow links to similar papers)
JEL-Codes: C62; D83; D84; E52; (follow links to similar papers)
30 pages, November 12, 2003
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