Equilibrium selection, observability and backward-stable solutions

George W. Evans; Bruce McGough

doi:10.1016/j.jmoneco.2018.04.004

Equilibrium selection, observability and backward-stable solutions

George W. Evans, Bruce McGough

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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 language	English
Pages (from-to)	1-10
Journal	Journal of Monetary Economics
Volume	98
Early online date	13 Apr 2018
DOIs	https://doi.org/10.1016/j.jmoneco.2018.04.004
Publication status	Published - Oct 2018

Keywords

Expectations
Learning
Observability
New Keynesian

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10.1016/j.jmoneco.2018.04.004

Evans-2018-Equilibrium-selection-JME-AAM
© 2018 Elsevier B. V. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1016/j.jmoneco.2018.04.004
Accepted author manuscript, 263 KBLicence: CC BY-NC-ND

George W Evans
- ge21st-andrews.acuk
- Economics (Business School) - Professor
Person: Academic

Cite this

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title = "Equilibrium selection, observability and backward-stable solutions",

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.",

keywords = "Expectations, Learning, Observability, New Keynesian",

author = "Evans, {George W.} and Bruce McGough",

note = "Financial support from National Science Foundation Grant No. SES-1559209 is gratefully acknowledged.",

year = "2018",

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doi = "10.1016/j.jmoneco.2018.04.004",

language = "English",

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Y1 - 2018/10

N2 - 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.

AB - 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.

KW - Expectations

KW - Learning

KW - Observability

KW - New Keynesian

U2 - 10.1016/j.jmoneco.2018.04.004

DO - 10.1016/j.jmoneco.2018.04.004

M3 - Article

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VL - 98

SP - 1

EP - 10

JO - Journal of Monetary Economics

JF - Journal of Monetary Economics

ER -

Equilibrium selection, observability and backward-stable solutions

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Keywords

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George W Evans

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