Coherence without Rationality at the Zero Lower Bound
General Economics
2023-11-01 v2 Economics
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.
Cite
@article{arxiv.2208.02073,
title = {Coherence without Rationality at the Zero Lower Bound},
author = {Guido Ascari and Sophocles Mavroeidis and Nigel McClung},
journal= {arXiv preprint arXiv:2208.02073},
year = {2023}
}