Expectational Stability and the Multiple Equilibria Problem in Linear Rational Expectations Models

1985 ◽  
Vol 100 (4) ◽  
pp. 1217 ◽  
Author(s):  
George Evans
Keyword(s):  
Rational Expectations ◽  
Multiple Equilibria

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.

SUNSPOTS, ANIMAL SPIRITS, AND ECONOMIC FLUCTUATIONS

2003 ◽  
Vol 7 (1) ◽  
pp. 140-169 ◽  
Author(s):  
Marcelle Chauvet ◽  
Jang-Ting Guo
Keyword(s):  
Business Cycles ◽  
Rational Expectations ◽  
Multiple Equilibria ◽  
Empirical Support ◽  
Economic Fluctuations ◽  
Macroeconomic Models ◽  
Animal Spirits ◽  
Economic Downturns ◽  
State Of The Economy

Multiple-equilibria macroeconomic models suggest that consumers' and investors' perceptions about the state of the economy may be important independent factors for business cycles. In this paper, we verify empirically the interrelations between waves of optimism and pessimism and subsequent economic fluctuations. We focus on the behavior of nonfundamental movements in the consumer sentiment index, as a proxy for consumers' sunspots, and in the business formation index, representing investors' animal spirits, around economic turning points. We find that bearish consumers and entrepreneurs were present before the onset of some U.S. economic downturns, sometimes even when the fundamentals were all very strong. In particular, our analysis shows that self-fulfilling pessimism may have played a nontrivial role in the 1969–1970, the 1973–1975, and the 1981–1982 recessions. The results are robust to a range of alternative linear and nonlinear specifications. Our evidence provides some empirical support for the role of nonfundamental rational expectations in economic fluctuations.

scholarly journals BOLHAS RACIONAIS, CICLO DE PREÇOS DE ATIVOS E RACIONALIDADE LIMITADA: UMA AVALIAÇÃO CRÍTICA DOS MODELOS NEOCLÁSSICOS DE BOLHAS ESPECULATIVAS

2009 ◽  
Vol 21 (40) ◽  
Author(s):  
José Luís Oreiro
Keyword(s):  
Bounded Rationality ◽  
Rational Expectations ◽  
Multiple Equilibria ◽  
Asset Price ◽  
Complete Information ◽  
Unified Framework ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Starting Point ◽  
Asset Price Cycles

The objective of this article is to criticize neoclassical models of asset price bubbles and to argue that a general theory of asset price cycles demands the substitution of rational expectations hypothesis for bounded rationality assumption. In order to do that we will initially present the two neoclassical approaches for the problem of asset price bubbles. The first one, based on models of multiple equilibria with rational expectations, take financial markets as competitive and investors's behavior as based on perfect and complete information. In this setting, asset bubbles are a logically possible but unprobable phenomenon since their ocurrence will be associated with problems of dynamic ineficience which are not a relevant problem for most of capitalist economies. The second approach, initially developed by Krugman, take as a starting point the idea that financial market are far from perfect. In fact, these markets have a great number of imperfections as, for example, moral hazard. In this approach, asset price bubbles are the result of trading in assets with low supply-price elasticity as, for example, equities and land. Although this second approach is more realistic than the first, it is not capable to explain in a unified framework the appearance, propagation and burst of the speculative bubble; i.e the phenomenon of asset price cycles. This second approach is only capable to show the conditions for the existence of an asset bubble; but it is not capable to explain the dynamic evolution of the bubble. This question is better adressed by heterodox literature based on the hypothesis of bounded rationality.

scholarly journals EXPECTATIONS, CREDIBILITY, AND TIME-CONSISTENT MONETARY POLICY

2000 ◽  
Vol 4 (4) ◽  
pp. 448-466 ◽  
Author(s):  
Peter N. Ireland
Keyword(s):  
Monetary Policy ◽  
Steady State ◽  
Rational Expectations ◽  
Multiple Equilibria ◽  
Monetary Authority ◽  
Milton Friedman ◽  
Short Run ◽  
Unique Steady State

This paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. It suggests that this problem originates in the assumption that agents have rational expectations and proposes several alternative restrictions on expectations that allow the monetary authority to build credibility for a disinflationary policy by demonstrating that it will stick to that policy even if it imposes short-run costs on the economy. Starting with these restrictions, the paper derives conditions that guarantee the uniqueness of the model's steady state; monetary policy in this unique steady state involves the constant deflation advocated by Milton Friedman.

Sign in / Sign up

Export Citation Format

Share Document