Coherence without rationality at the zero lower bound

DOI10.1016/J.JET.2023.105745MaRDI QIDQ6139973zbMATH OpenOpenAlexFDO

Authors Guido Ascari, Sophocles Mavroeidis, Nigel McClung

Publication date 19 January 2024

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

Copyright license Creative Commons Attribution 4.0 International

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

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)

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.

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