Equilibrium selection, observability and backward-stable solutions

George W. Evans, Bruce McGough

    Research output: Contribution to journalArticlepeer-review

    6 Citations (Scopus)
    1 Downloads (Pure)

    Abstract

    The robustness of stability under learning to observability of exogenous shocks is examined. Regardless of observability assumptions, the minimal state variable solution is robustly stable under learning provided the expectational feedback is not both positive and large, while the nonfundamental solution is never robustly stable. Overlapping generations and New Keynesian models are considered and concerns raised in [Cochrane, J., 2011. Determinacy and identification with Taylor rules. Journal of Political Economy 119, 565-615, Cochrane, J., 2017. The new-Keynesian liquidity trap. Journal of Monetary Economics, forthcoming.] are addressed.
    Original languageEnglish
    Pages (from-to)1-10
    JournalJournal of Monetary Economics
    Volume98
    Early online date13 Apr 2018
    DOIs
    Publication statusPublished - Oct 2018

    Keywords

    • Expectations
    • Learning
    • Observability
    • New Keynesian

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