Stability of functional rational expectations equilibria (Q5927616)

The paper deals with a specific case of self-referential economic models. The attention is focused to the representative agent forecasting prices, namely to intermediate stage learning with periodical updating of the forecasting rule. It is shown that such learning rule does not converge to the rational expectations equilibrium. The situation becomes significantly better if two stages learning is considered, where agents learn the functional mapping between the curent and previous forecast functions. The convergence of the two stage learning rule to the rational expectations equilibria is hown in the theory as well as in simulations.