Abstract
Bullard (1994) and Schönhofer (1999) show that endogenous business cycles may emerge in an inflationary overlapping generations model where households predict future inflation rates by running a least squares regression on prices. We show that given the same beliefs but under an alternative, more natural, estimation procedure based upon inflation rates the monetary steady state will be globally stable for a large set of savings functions. We also study an evolutionary competition between the two estimation procedures. Although the dynamics are stabilized for a large set of parameter values, endogenous business cycles may still emerge in this heterogeneous beliefs framework.
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This paper benefitted much from discussions with Jim Bullard, Maurice Bun, Cees Diks, Cars Hommes, Jan Kiviet and Claus Weddepohl. The constructive remarks of an anonymous referee led to significant improvements. This research has been supported by the Netherlands Organisation for Scientific Research (NWO) under a MaGW-Pionier grant.
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Tuinstra, J., Wagener, F.O.O. On learning equilibria. Economic Theory 30, 493–513 (2007). https://doi.org/10.1007/s00199-005-0059-1
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DOI: https://doi.org/10.1007/s00199-005-0059-1
Keywords
- Overlapping generations models
- Learning
- Endogenous business cycles
- Heterogeneous beliefs
- Evolutionary dynamics