Stability properties for learning with heterogeneous expectations and multiple equilibria

Guse, Eran

doi:10.1016/j.jedc.2004.08.010

Cited by 54 publications

(35 citation statements)

References 22 publications

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“…8 See also Guse (2005), who looks at "mixed expectations equilibria," in which a given proportion of agents may underparameterize the solution. 9 We identify model 1 as the model with the z 1,t component and model 2 is defined symmetrically.…”

Section: Model Misspecificationmentioning

confidence: 99%

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Model uncertainty and endogenous volatility

Branch

Evans

2007

Review of Economic Dynamics

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This paper identifies two channels through which the economy can generate endogenous inflation and output volatility, an empirical regularity, by introducing model uncertainty into a Lucas-type monetary model. The equilibrium path of inflation depends on agents' expectations and a vector of exogenous random variables. Following Branch and Evans agents are assumed to underparameterize their forecasting models [Branch, W., Evans, G.W., 2006a. Intrinsic heterogeneity in expectation formation. Journal of Economic Theory 127, 264-295]. A Misspecification Equilibrium arises when beliefs are optimal, given the misspecification, and predictor proportions are based on relative forecast performance. We show that there may exist multiple Misspecification Equilibria, a subset of which is stable under least squares learning and dynamic predictor selection. The dual channels of least squares parameter updating and dynamic predictor selection combine to generate regime switching and endogenous volatility.

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Section: Model Misspecificationmentioning

confidence: 99%

“…In his model, though, there exist equilibria which are REE. Guse (2005) also studies a model with multiple REE and where agents' forecasting models are distributed across the representations consistent with each REE.…”

Section: Further Intuition For Multiple Equilibriamentioning

confidence: 99%

Model uncertainty and endogenous volatility

Branch

Evans

2007

Review of Economic Dynamics

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“…Therefore, the necessary and sufficient condition for the E-stability of the REE is (13). (13) is rewritten as follows:…”

Section: E-stabilitymentioning

confidence: 99%

“…However, this could be regarded as an extreme case. 13 In this subsection, therefore, we consider a more realistic environment in which some private agents engage in adaptive learning by referring to the central bank's forecast. Suppose that a proportion μ of private agents engage in adaptive learning by referring to the central bank's forecast (1 ≥ μ ≥ 0).…”

Section: E-stability When Part Of Private Agents Are Learning From Thmentioning

confidence: 99%

Monetary policy and learning from the central bank's forecast

Muto

2011

Journal of Economic Dynamics and Control

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We examine the expectational stability (E-stability) of the rational expectations equilibrium (REE) in a simple New Keynesian model in which private agents engage in adaptive learning by referring to the central bank's forecast. In this environment, to satisfy the E-stability condition, the central bank must respond more strongly to the expected inflation rate than the so-called Taylor principle suggests. On the other hand, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy is to respond to the current inflation rate to a certain degree.

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“…Branch andMcGough (2004, 2009) indicate that specifications that are determinate under rational expectations may possess multiple equilibria in the case of heterogeneity of expectations. Guse (2005) shows that the learnability of the HEE is affected by the proportion of agents that use each different learning model. Berardi (2007) finds the conditions under which the HEE is learnable while the REE is not under a correctly specified learning rule.…”

Section: Introductionmentioning

confidence: 99%

Learnability of Heterogeneous Misspecification Equilibrium

Nakagawa

2012

SSRN Journal

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This paper investigates the learnability of the equilibrium under adaptive learning with heterogeneous and misspecified models. Agents have imperfect and mutually different information sets of economic variables, so they form heterogeneous expectations under learning rules that are differently underparameterized. Under heterogeneous learning, the economy converges to a type of restricted perceptions equilibrium, which here is called a Heterogeneous Misspecification Equilibrium (HME). The paper finds that the HME is more learnable than the equilibrium under homogeneous and correctly specified learning rules that corresponds to a rational expectations equilibrium (REE); in other words, the stability conditions of the HME are less stringent than those of the REE. In a basic NK model with a Taylor-type monetary policy rule, for example, the central bank is allowed to choose a wider range of values of policy parameters to ensure the learnability of the HME than that permitted to ensure the learnability of the REE, that is, the Taylor principle. In addition, if the correlation between demand and supply shocks is low, the stability conditions of the HME become further less stringent so that the central bank might not have to address the learnability of the equilibrium.

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Stability properties for learning with heterogeneous expectations and multiple equilibria

Cited by 54 publications

References 22 publications

Model uncertainty and endogenous volatility

Model uncertainty and endogenous volatility

Monetary policy and learning from the central bank's forecast

Learnability of Heterogeneous Misspecification Equilibrium

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