Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices

CFS Working Paper No. 2003/03

42 Pages Posted: 2 Oct 2001

See all articles by Klaus Adam

Klaus Adam

University of Mannheim; European Central Bank (ECB) - Department of Research; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2002

Abstract

We study adaptive learning in a monetary overlapping generations model with sticky prices and monopolistic competition for the case where learning agents observe current endogenous variables. Observability of current variables is essential for informational consistency of the learning setup with the model setup but generates multiple temporary equilibria when prices are flexible and prevents a straightforward construction of the learning dynamics. Sticky prices overcome this problem by avoiding simultaneity between prices and price expectations. Adaptive learning then robustly selects the determinate (monetary) steady state independent from the degree of imperfect competition. The indeterminate (non-monetary) steady state and non-stationary equilibria are never stable. Stability in a deterministic version of the model may differ because perfect foresight equilibria can be the limit of restricted perceptions equilibria of the stochastic economy with vanishing noise and thereby inherit different stability properties. This discontinuity at the zero variance of shocks suggests to analyze learning in stochastic models.

Keywords: adaptive learning, sticky prices, temporary equilibrium, equilibrium selection

JEL Classification: E31, D83, C62

Suggested Citation

Adam, Klaus, Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices (November 2002). CFS Working Paper No. 2003/03, Available at SSRN: https://ssrn.com/abstract=285473 or http://dx.doi.org/10.2139/ssrn.285473

Klaus Adam (Contact Author)

University of Mannheim ( email )

Department of Economics
L7 ,3-5
Mannheim, 68131
Germany

HOME PAGE: http://adam.vwl.uni-mannheim.de/1528.0.html

European Central Bank (ECB) - Department of Research ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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