Coherence without rationality at the zero lower bound

DOI10.1016/J.JET.2023.105745arXiv2208.02073OpenAlexW4387747378MaRDI QIDQ6139973FDOQ6139973

Authors: Guido Ascari, Sophocles Mavroeidis, Nigel McClung 

Publication date: 19 January 2024

Published in: Journal of Economic Theory (Search for Journal in Brave)

Abstract: Standard rational expectations (RE) models with an occasionally binding zero lower bound (ZLB) constraint either admit no solutions (incoherence) or multiple solutions (incompleteness). This paper shows that deviations from full-information RE mitigate concerns about incoherence and incompleteness. Models with no RE equilibria admit self-confirming equilibria involving the use of simple mis-specified forecasting models. Completeness and coherence is restored if expectations are adaptive or if agents are less forward-looking due to some information or behavioral friction. In the case of incompleteness, the E-stability criterion selects an equilibrium.

Full work available at URL: https://arxiv.org/abs/2208.02073

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zbMATH Keywords

incompletenessexpectationsincoherencezero lower bound

Mathematics Subject Classification ID

Macroeconomic theory (monetary models, models of taxation) (91B64) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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