Coherence without Rationality at the Zero Lower Bound

2022/08/03 by Ascari, Guido, Mavroeidis, Sophocles, McClung, Nigel · 1 citation
#FOS: Economics and business #General Economics (econ.GN)

paper · doi:10.48550/arxiv.2208.02073

Abstract

Standard rational expectations models with an occasionally binding zero lower bound constraint either admit no solutions (incoherence) or multiple solutions (incompleteness). This paper shows that deviations from full-information rational expectations mitigate concerns about incoherence and incompleteness. Models with no rational expectations 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.

Cited by

• Clearing Up the Effective Lower Bound Morass

Related

• Coherence without rationality at the zero lower bound
• The Origin and the Resolution of Nonuniqueness in Linear Rational\n Expectations
• Alpha-consistent expectations equilibria
• Simple Models and Biased Forecasts
• The unbearable lightness of equilibria in a low interest rate\n environment