A continuum of path-dependent equilibrium solutions induced by sticky expectations.

DOI10.21136/AM.2023.0229-22MaRDI QIDQ6136997zbMATH OpenOpenAlexFDO

Authors Pavel Krejč{í }, Eyram Kwame, Harbir Lamba, Dmitrii Rachinskii, Andrei Zagvozdkin

Publication date 18 January 2024

Published in Applications of Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1711.08038

zbMATH Keywords

macroeconomic modelpath-dependenceequilibrium pointrational expectationhysteresis play operatorsticky inflation

Mathematics Subject Classification ID

Dynamical systems in optimization and economics (37N40) Equations with nonlinear hysteresis operators (47J40)

Abstract: We analyze a simple macroeconomic model where rational inflation expectations is replaced by a boundedly rational, and genuinely sticky, response to changes in the actual inflation rate. The stickiness is introduced in a novel way using a mathematical operator that is amenable to rigorous analysis. We prove that, when exogenous noise is absent from the system, the unique equilibrium of the rational expectations model is replaced by an entire line segment of possible equilibria with the one chosen depending, in a deterministic way, upon the previous states of the system. The agents are sufficiently far-removed from the rational expectations paradigm that problems o indeterminacy do not arise. The response to exogenous noise is far more subtle than in a unique equilibrium model. After sufficiently small shocks the system will indeed revert to the same equilibrium but larger ones will move the system to a different one (at the same model parameters). The path to this new equilibrium may be very long with a highly unpredictable endpoint. At certain model parameters exogenously-triggered runaway inflation can occur. Finally, we analyze a variant model in which the same form of sticky response is introduced into the interest rate rule instead.

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