DP1310 Convergence in Monetary Inflation Models with Heterogeneous Learning Rules

Author(s): George W. Evans, Seppo Honkapohja, Ramon Marimon
Publication Date: January 1996
Keyword(s): Experimental Evidence, Fiscal Rules, Hyperinflation
JEL(s): E42, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1310

Inflation and financing of public expenditure by are analysed in an OLG model where the deficit is constrained to be less than a given fraction of intergenerational savings. Even if there may be multiplicity of steady-state equilibria, we show that, with such a constraint, the dynamics with adaptive learning are globally convergent to a set of equilibria satisfying a local stability condition. We allow for heterogeneity of agents' learning rules and look at the role of some basic behavioural assumptions, such as a certain degree of random e-precautionary savings and inertia on agents' updating of beliefs. We also provide experimental evidence on the effect of public expenditure constraints on the stability of equilibria.