Coherence without rationality at the zero lower bound

2023/10/18 by Guido Ascari, Sophocles Mavroeidis, Nigel McClung · 1 citation
Economics, Econometrics and Finance · #Economic theories and models #Monetary Policy and Economic Impact #Economic Policies and Impacts

paper · doi:10.1016/j.jet.2023.105745

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 are 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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• Clearing Up the Effective Lower Bound Morass

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