scholarly journals Multiple Equilibria in Noisy Rational Expectations Economies

2014 ◽  
Author(s):  
DDmmttr PPlvvlgyi ◽  
Gyuri Venter
Keyword(s):  
Rational Expectations ◽  
Multiple Equilibria ◽  
Noisy Rational Expectations

scholarly journals Self-Fulfilling Currency Crises: The Role of Interest Rates

2006 ◽  
Vol 96 (5) ◽  
pp. 1769-1787 ◽  
Author(s):  
Christian Hellwig ◽  
Arijit Mukherji ◽  
Aleh Tsyvinski
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Rational Expectations ◽  
Currency Crises ◽  
Multiple Equilibria ◽  
Asset Market ◽  
Equilibrium Uniqueness ◽  
Private Signals ◽  
Special Cases

We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected by the introduction of noisy private signals. We conclude that the global games results on equilibrium uniqueness do not apply to market-based models of currency crises.

scholarly journals INTEREST RATE RULES AND MACROECONOMIC STABILITY UNDER HETEROGENEOUS EXPECTATIONS

2012 ◽  
Vol 17 (8) ◽  
pp. 1574-1604 ◽  
Author(s):  
Mikhail Anufriev ◽  
Tiziana Assenza ◽  
Cars Hommes ◽  
Domenico Massaro
Keyword(s):  
Interest Rate ◽  
Rational Expectations ◽  
Multiple Equilibria ◽  
Monetary Authority ◽  
Past Performance ◽  
Inflation Dynamics ◽  
Interest Rate Rules ◽  
Heterogeneous Expectations ◽  
Dynamic Stochastic ◽  
The Interest Rate

The recent macroeconomic literature stresses the importance of managing heterogeneous expectations in the formulation of monetary policy. We use a simple frictionless dynamic stochastic general equilibrium (DSGE) model to investigate inflation dynamics under alternative interest rate rules when agents have heterogeneous expectations, and update their beliefs based on past performance, as in Brock and Hommes [Econometrica65(5), 1059–1095 (1997)]. The stabilizing effect of different monetary policies depends on the ecology of forecasting rules (i.e., the composition of the set of predictors), on agents' sensitivity to differences in forecasting performance, and on how aggressively the monetary authority sets the nominal interest rate in response to inflation. In particular, if the monetary authority responds only weakly to inflation, a cumulative process with rising inflation is likely. On the other hand, a Taylor interest rate rule that sets the interest rate more than point for point in response to inflation stabilizes inflation dynamics, but does not always lead the system to converge to the rational expectations equilibrium, as multiple equilibria may persist.

scholarly journals Discretionary policy and multiple equilibria in a new Keynesian model

2019 ◽  
Author(s):  
Volker Hahn
Keyword(s):  
Rational Expectations ◽  
Multiple Equilibria ◽  
Alternative Explanation ◽  
New Keynesian ◽  
Macroeconomic Fluctuations ◽  
Economic Fundamentals ◽  
Keynesian Model ◽  
Endogenous Variables ◽  
New Policies ◽  
High Degree

Abstract We show that discretionary policymaking can lead to multiple rational-expectations equilibria where the central bank responds to inflation sentiments, which are driven by past endogenous variables but are unrelated to current economic fundamentals. Some of these equilibria have favourable consequences for welfare, resulting in outcomes superior even to those achieved under timeless-perspective commitment. Inflation sentiments also provide a novel explanation for the sizeable macroeconomic fluctuations in many countries in the 1970s. Compared to interest-rate rules violating the Taylor principle, our explanation has the advantage of providing a rationale for why central banks that are confronted with inefficiently large macroeconomic fluctuations may not be able to deviate to new policies with superior macroeconomic outcomes. Moreover, we show that our approach provides an alternative explanation for the high degree of inflation persistence found in the data.

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