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: www.cepr.org/pubs/dps/DP1310.asp

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.