ON LEARNING AND THE NONUNIQUENESS OF EQUILIBRIUM IN AN OVERLAPPING GENERATIONS MODEL WITH FIAT MONEY

This paper examines disequilibrium adaptive learning behavior in an overlapping generations model with fiat money. Agents are concerned with forming correct forecasts of future inflation. If they use a disequilibrium, adaptive forecast rule, it is shown that they will eventually learn to believe in a nonstationary, nonunique perfect foresight equilibrium. The nonstationary equilibrium isolated by the adaptive learning process can be used to explain the sluggish adjustment of the price level to monetary disturbances as documented in the time series analysis of Sims (Amer. J. Agr. Econ. 71 (1989), 489-494). (C) 1994 Academic Press, Inc.