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Dynamic Sparse Restricted Perceptions Equilibria

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  • Volha Audzei
  • Sergey Slobodyan

Abstract

This paper studies convergence properties, including local and global strong E-stability, of the rational expectations equilibrium under non-smooth learning dynamics. In a simple New Keynesian model, we consider two types of informational constraints operating jointly - adaptive learning and sparse rationality. For different initial beliefs, we study if the convergence to the minimum state variable rational expectations equilibrium (MSV REE) occurs over time for positive costs of attention. We find that for any initial beliefs the agents’ forecasting rule converges either to the MSV REE equilibrium, or, for large attention costs, to a rule that disregards all variables but the constant. Stricter monetary policy slightly favors the constant only rule. Mis-specified forecasting rule that uses variable not present in the MSV REE does not survive this learning algorithm. Theory of non-smooth differential equations is applied to study the dynamics of our learning algorithm.

Suggested Citation

  • Volha Audzei & Sergey Slobodyan, 2024. "Dynamic Sparse Restricted Perceptions Equilibria," CERGE-EI Working Papers wp792, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp792
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    References listed on IDEAS

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    More about this item

    Keywords

    Bounded rationality; Expectations; Learning; Monetary policy;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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