Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky

PricesThis paper studies the properties of adaptive learning as a device to select amongst the rational expectations equilibria of a monetary overlapping generations model. It extends previous contributions by introducing monopolistic competition and improves upon them by analyzing learning in a model with a well-defined temporary equilibrium map, a coherent informational setup, and properly specified microfoundations. The main result is that adaptive learning is a robust selection mechanism that independent from the degree of imperfect competition always selects the same equilibrium. The indeterminate steady state and the non-stationary equilibria are never stable. The determinate low inflation steady state is the unique stable equilibrium; however, depending on how agents forecast, stability is found to be related to observable characteristics of the economy.