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Coherence without rationality at the zero lower bound

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  • Ascari, Guido
  • Mavroeidis, Sophocles
  • McClung, Nigel

Abstract

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.

Suggested Citation

  • Ascari, Guido & Mavroeidis, Sophocles & McClung, Nigel, 2023. "Coherence without rationality at the zero lower bound," Journal of Economic Theory, Elsevier, vol. 214(C).
    • Handle: RePEc:eee:jetheo:v:214:y:2023:i:c:s0022053123001412
    DOI: 10.1016/j.jet.2023.105745
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    More about this item

    Keywords

    Incompleteness; Incoherence; Expectations; Zero lower bound;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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