Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/195066
Authors: 
Branch, William A.
Gasteiger, Emanuel
Year of Publication: 
2019
Series/Report no.: 
ECON WPS No. 03/2019
Abstract: 
This paper develops a theory of endogenously (non-)Ricardian beliefs. That is, whether Ricardian Equivalence holds in an equilibrium depends on endogenous private sector beliefs. The novelty here is a restricted perceptions viewpoint: in complex forecasting environments, agents forecast aggregate variables with (potentially) misspecified models that are optimal within the restricted class, i.e., a restricted perceptions equilibrium (RPE). A misspecification equilibrium is a refinement of an RPE where the choice of restricted models is endogenous. Our formalization considers two predictors: in one rule Ricardian beliefs emerge as a self-confirming equilibrium, while the other features an equilibrium with non-Ricardian beliefs. We show that (1.) there can exist misspecification equilibria where beliefs are endogenously (non-)Ricardian, (2.) multiple equilibria exist where the economy can coordinate on Ricardian or non-Ricardian equilibria. The theory suggests a novel interpretation of post-war U.S. inflation data as being generated by endogenous belief-driven regime change and a nuanced trade-off for monetary policy rules.
Subjects: 
adaptive learning
misspecification
heterogeneous beliefs
fiscal theory of price level
JEL: 
D82
D83
E40
E50
Document Type: 
Working Paper

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