Impacts of priors on convergence and escapes from Nash inflation

Thomas J. Sargent, Noah Williams

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Recent papers have analyzed how economies with adaptive agents may converge to and escape from self-confirming equilibria. These papers have imputed to agents a particular prior about drifting coefficients. In the context of a model of monetary policy, this paper analyzes dynamics that govern both convergence and escape under a more general class of priors for the government. We characterize how the shape of the prior influences possible cycles, convergence, and escapes. There are priors for which the E-stability condition is not enough to assure local convergence to a self-confirming equilibrium. Our analysis also isolates the source of differences in the sustainability of Ramsey inflation encountered in the analyses of Sims [Revista de Analisis Economico 3 (1988) 3] and Chung [PhD Thesis, University of Minnesota, 1990], on the one hand, and Cho, Williams, and Sargent [Rev. Econ. Stud. 69 (2002) 1], on the other.

    Original languageEnglish (US)
    Pages (from-to)360-391
    Number of pages32
    JournalReview of Economic Dynamics
    Volume8
    Issue number2 SPEC. ISS.
    DOIs
    StatePublished - Apr 2005

    Keywords

    • Adaptation
    • Escape route
    • Large deviation
    • Mean dynamics
    • Natural rate of unemployment
    • Priors
    • Self-confirming equilibrium

    ASJC Scopus subject areas

    • Economics and Econometrics

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