[工程科技]Escaping Nash Inflation.pdfVIP

ESCAPING NASH INFLATION IN-KOO CHO, NOAH WILLIAMS, AND THOMAS J. SARGENT ABSTRACT. Mean dynamics describe the convergence to self-confirming equilibria of self- referential systems under discounted least squares learning. Escape dynamics recurrently propel away from a self-confirming equilibrium. In a model with a unique self-confirming equilibrium, the escape dynamics make the government discover too strong a version of the natural rate hypothesis. The escape route dynamics cause recurrent outcomes close to the Ramsey (commitment) inflation rate in a model with an adaptive government. Key Words: Self-confirming equilibrium, mean dynamics, escape route, large deviation, natural rate of unemployment, adaptation, experimenta- tion trap. ‘If an unlikely event occurs, it is very likely to occur in the most likely way.’ Michael Harrison 1. INTRODUCTION Building on work by Sims (1988) and Chung (1990), Sargent (1999) showed how a government adaptively fitting an approximating Phillips curve model recurrently sets inflation near the optimal time-inconsistent ouctome, although later inflation creeps back to the time-consistent suboptimal outcome of Kydland and Prescott (1977). The good outcomes emerge when the government temporarily learns the natural rate hypothe- sis. The temporary escapes from the time-consistent outcome symptomize a remarkable type of escape dynamics that promote experimentation and that are induced by unusual shock patterns that interact with the government’s adaptive algorithm and its imperfect model. The escapes lead to dramatic changes in the government’s inflation policy as it temporarily overcomes its inflationary bias. So