Escaping nash inflation

In Koo Cho, Noah Williams, Thomas J. Sargent

    Research output: Contribution to journalArticlepeer-review

    Abstract

    An ordinary differential equation (ODE) gives the mean dynamics that govern the convergence to self-confirming equilibria of self-referential systems under discounted least squares learning. Another ODE governs escape dynamics that recurrently propel away from a self-confirming equilibrium. In a model with a unique self-confirming equilibrium, the escape dynamics make the government discover too strong a version of the natural rate hypothesis. The escape route dynamics cause recurrent outcomes close to the Ramsey (commitment) inflation rate in a model with an adaptive government.

    Original languageEnglish (US)
    Pages (from-to)1-40
    Number of pages40
    JournalReview of Economic Studies
    Volume69
    Issue number1
    DOIs
    StatePublished - 2002

    ASJC Scopus subject areas

    • Economics and Econometrics

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