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 , Stability , Sunspots , Monetary policy

JEL(s): D84 , E31 , E52

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2846.asp

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.