Are Rational Explosive Solutions Learnable?

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Abstract

It is commonly believed that rational explosive solutions are unstable or fragile under adaptive learning. Contrary to this belief, the paper shows that under realistic parameterizations, rational explosive solutions are both E-stable and strongly E-stable in a class of models with lagged endogenous variables. It also establishes the convergence of least squares learning process to explosive solutions. Taking a simple Cagan model of inflation as an application, the paper shows that money supply feedback rule gives rise to a rational explosive solution for prices which is learnable in real time. This provides a new potential explanation for historical high inflation. Finally, E-stability results for non-MSV explosive solutions are provided.
Original languageEnglish
Pages (from-to)62-66
JournalEconomics Letters
Volume157
Early online date2 Jun 2017
DOIs
Publication statusPublished - 1 Aug 2017

Keywords

  • Money supply
  • Learnability
  • Inflation
  • E-stability

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