Equilibrium selection, observability and backward-stable solutions
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The robustness of stability under learning to observability of exogenous shocks is examined. Regardless of observability assumptions, the minimal state variable solution is robustly stable under learning provided the expectational feedback is not both positive and large, while the nonfundamental solution is never robustly stable. Overlapping generations and New Keynesian models are considered and concerns raised in [Cochrane, J., 2011. Determinacy and identification with Taylor rules. Journal of Political Economy 119, 565-615, Cochrane, J., 2017. The new-Keynesian liquidity trap. Journal of Monetary Economics, forthcoming.] are addressed.
Evans , G W & McGough , B 2018 , ' Equilibrium selection, observability and backward-stable solutions ' , Journal of Monetary Economics , vol. 98 , pp. 1-10 . https://doi.org/10.1016/j.jmoneco.2018.04.004
Journal of Monetary Economics
© 2018 Elsevier B. V. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1016/j.jmoneco.2018.04.004
DescriptionFinancial support from National Science Foundation Grant No. SES-1559209 is gratefully acknowledged.
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