Published and unpublished papers by Wei Xiao

Are Dynamically Inefficient Equilibria Learnable?

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A joint paper with John Duffy (download)

We consider the stability under adaptive learning dynamics of steady state equilibria in Diamond’s (1965) overlapping generations growth model with capital and money. Interior steady state equilibria of this model can be either dynamically inefficient or dynamically efficient. We show that a necessary condition for an equilibrium of this model to be stable under adaptive learning is that the equilibrium is dynamically efficient. In other words, adaptive learning can be used as a selection criterion to exclude dynamically inefficient equilibria. We also provide conditions under which a dynamically efficient equi- librium of this model involving the use of both capital and money will be stable under adaptive learning dynamics.


Written by wxiao

July 24, 2011 at 10:02 pm

Posted in Working paper

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