Working Paper

When does determinacy imply expectational stability?

Abstract: In the recent literature on monetary and fiscal policy design, adoption of policies that induce both determinacy and learnability of equilibrium has been considered fundamental to economic stabilization. We study the connections between determinacy of rational expectations equilibrium, and expectational stability or learnability of that equilibrium, in a general class of purely forward-looking models. We ask what types of economic assumptions drive differences in the necessary and sufficient conditions for the two criteria. We apply our result to a relatively general New Keynesian model. Our framework is sufficiently flexible to encompass lags in information, a cost channel for monetary policy, and either Euler equation or infinite horizon approaches to learning. We are able to isolate conditions under which determinacy does and does not imply learnability, and also conditions under which long horizon forecasts make a clear difference to conclusions about expectational stability. The sharpest result is that informational delays break equivalence connections between determinacy and learnability.

Keywords: Rational expectations (Economic theory);

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2009

Number: 2008-007