Seppo Honkapohja

Learning, convergence, and stability with multiple rational expectations equilibria

Abstract For a linear model with multiple rational expectations equilibria (REE) we discuss the set of possible REE. Solutions include (i) locally unique minimal state variable solutions, taking an AR(1) form and (ii) continua of solutions which may depend on sunspots. We analyze the convergence of econometric learning to the different REE. There exist cases with more than one stable AR(1) solution. It is also possible for a continuum of solutions to be stable, but this property is not robust to overparametrization. An application is developed, and it is suggested that the exhibited phenomena may arise in applied macroeconomic models.

Stable Sunspot Equilibria in a Cash-in-Advance Economy

We develop a monetary model with flexible supply of labor, cash in advance constraints and government spending financed by seignorage. This model has two regimes. One regime is conventional with two steady states. The other regime has a unique steady state which can be determinate or indeterminate. In the latter case there exist sunspot equilibria which are stable under adaptive learning, taking the form of noisy finite state Markov processes at resonant frequencies. For a range of parameter values, a sufficient reduction in government purchases will eliminate these equilibria.

The 1980s Financial Liberalization in the Nordic Countries

The financial liberalization in the four Nordic countries (Denmark, Finland, Norway, and Sweden) that took place mostly in the 1980s led to a major financial crisis in three of those countries. The crises in Finland, Norway, and Sweden are among the deepest financial crises in advanced market economies since World War II. Denmark experienced some banking problems but managed to avoid a systemic crisis. This paper reviews the process of liberalization and discusses the reasons why Finland, Norway, and Sweden drifted into financial and economic crises.

Discussion of Preston, 'Learning About Monetary Policy Rules When Long-Horizon Expectations Matter'

The design of interest rate rules for conducting monetary policy have recently been examined for two key concerns. The first issue is determinacy of equilibria. Indeterminacy (multiplicity of stationary rational expectations equilibria) is a concern in models of monopolistic competition and price stickiness are currently a popular framework for the study of monetary policy. The second issue is stability of equilibria under adaptive learning. Some interest rate rules do not perform well when the expectations of the agents get out of equilibrium, e.g. as a result of structural shifts.