TY - JOUR
T1 - Equilibrium selection, observability and backward-stable solutions
AU - Evans, George W.
AU - McGough, Bruce
N1 - Financial support from National Science Foundation Grant No. SES-1559209 is gratefully acknowledged.
PY - 2018/10
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
UR - https://www.scopus.com/pages/publications/85046152400
U2 - 10.1016/j.jmoneco.2018.04.004
DO - 10.1016/j.jmoneco.2018.04.004
M3 - Article
SN - 0304-3932
VL - 98
SP - 1
EP - 10
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
ER -
