DP2846 Are Non-Fundamental Equilibria Learnable in Models of Monetary Policy?

Author(s): Seppo Honkapohja, Kaushik Mitra
Publication Date: June 2001
Keyword(s): Adaptive Learning, Monetary policy, Stability, Sunspots
JEL(s): D84, E31, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2846

Recent models of monetary policy can have indeterminacy of equilibria. The indeterminacy property is often viewed as a difficulty of these models. We consider its significance using the learning approach to expectations formation by employing expectational stability as a robustness criterion for different equilibria. We derive the expectational stability and instability conditions for forward-looking multivariate models, both with and without lags, that cover a wide range of monetary policies proposed in the literature.