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On learning equilibria

Author

Listed:
  • Tuinstra, J.

    (Universiteit van Amsterdam)

  • Wagener, F.O.O.

    (Universiteit van Amsterdam)

Abstract
We investigate an inflationary overlapping generations model where households predict future inflation rates by running a least squares regression of inflation rates or prices on their past levels. We critically examine the results on learning equilibria obtained by Bullard (1994) and Schönhofer (1999) in this framework. They show that an increase in the money growth rate may lead to limit cycles and endogenous business cycles. We suggest an alternative estimation procedure, that starts from the same perceived law of motion, but is more sensible from an econometrician's point of view. We prove that for this estimation procedure there is global convergence on the monetary steady for a large set of savings functions. We also study, in a heterogeneou agents framework, evolutionary competition between the two estimation procedures, where the fraction of the population using a certain estimation procedure is determined by its past average quadratic forecast error. Interestingly, the more sensible estimation procedure is not always able to drive out the other estimation procedure, and endogenous business cycles may still be observed in this heterogeneous world.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Tuinstra, J. & Wagener, F.O.O., 2000. "On learning equilibria," CeNDEF Working Papers 00-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    • Handle: RePEc:ams:ndfwpp:00-12
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    References listed on IDEAS

    as
    1. William A. Brock & Cars H. Hommes, 2001. "A Rational Route to Randomness," Chapters, in: W. D. Dechert (ed.), Growth Theory, Nonlinear Dynamics and Economic Modelling, chapter 16, pages 402-438, Edward Elgar Publishing.
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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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