Escaping Nash Inflation

By In-Koo Cho, Noah Williams, Thomas J. Sargent. Social Science Research Network, 2000

216 citations recorded by the source corpus.

Mean dynamics govern convergence to rational expectations equilibria of self-referential systems under least squares learning. We highlight escape dynamics that propel away from a rational expectations equilibrium under fixed-gain recursive learning schemes. These learning schemes discount past observations. In a model with a unique self-confirming equilibrium, we show that the destination of the escape dynamics is an outcome associated with government discovery of too strong a version of the natural rate hypothesis. That destination is not sustainable as a self-confirming equilibrium but is visited recurrently. The escape route dynamics cause recurrent outcomes close to the Ramsey (commitment) inflation rate in a model with an adaptive government. JEL Classification: E3, E52, E58

Subfields: Economics and Econometrics, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/73f3e5c3dc7770c2facfeb4fb223e36119dba41e

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Citations in the corpus

Learning and Equilibrium (2009, background): “Much of the area was pioneered by Marcet & Sargent (1998a,b), and recent contributions include Cho et al. (2002) and Sargent & Williams (2005) who examined the dynamics of escaping from “Nash” inflation.”
Shocks and Government Beliefs: The Rise and Fall of American Inflation (2006, unknown): “Sargent (1999) and Cho et al. (2002) suggested that U.S. experience could be explained by convergence to a high Nash inflation level coupled with occasional escapes to a lower Ramsey level.”
Evolving Post-World War II U.S. Inflation Dynamics (2001, background): “32Prospects for a gradual backsliding away from the zero inflation Ramsey outcome toward the higher Nash inflation rate also permeate the ‘mean dynamics’ in the model of Sargent (1999) and Cho, Williams, and Sargent (2001).”
The Conquest of U.S. Inflation: Learning and Robustness to Model Uncertainty (2005, unknown): “The escape route models of Sargent (1999) and Cho et al. (2002) predict an inverse correlation, but Cogley and Sargent (2001, 2005) estimate a positive correlation.”
Bayesian networks and boundedly rational expectations (2016, background): “To see why strategic rationality holds in this case, note that (2) = ∅ and (3) = {1}; by Proposition 6 we only need to check that 2 ⊥∗ 1, which clearly holds.”