On learning equilibria

Abstract

Bullard (1994) and Schönhofer (1999) show that endogenous business cycles may emerge in an inflationary overlapping generations model where households predict future inflation rates by running a least squares regression on prices. We show that given the same beliefs but under an alternative, more natural, estimation procedure based upon inflation rates the monetary steady state will be globally stable for a large set of savings functions. We also study an evolutionary competition between the two estimation procedures. Although the dynamics are stabilized for a large set of parameter values, endogenous business cycles may still emerge in this heterogeneous beliefs framework. © Springer-Verlag 2006.