Coherence without rationality at the zero lower bound
Ascari, Guido; Mavroeidis, Sophocles; McClung, Nigel (31.10.2023)
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Volyymi
214Numero
December 2023
2023
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-202109131537Tiivistelmä
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.