Working Paper: NBER ID: w0855
Authors: Maurice Obstfeld; Kenneth Rogoff
Abstract: Knife-edge stability is a common property of dynamic monetary models assuming perfect foresight or rational expectations. These models can be closed with the assumption that the economy's equilibrium lies on the unique convergent path (the saddlepath). While this empirically plausible assumption yields sensible results, aggregative models are not specified in sufficient detail to allow one to prove that the saddlepath is the unique equilibrium path. Brock (1974, 1975) and Brock and Scheinkman (1980) have advanced models in which individual preferences are more fully specified and in which, under certain conditions, the uniqueness and stability of equilibrium can be rigorously demonstrated. This paper shows that these uniqueness conditions are economically unreasonable. Therefore, the question these maximizing models address remains unresolved.
Keywords: hyperinflation; monetary models; rational expectations
JEL Codes: E31; E41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Infinitely negative utility when real balances are zero (D11) | Stability of hyperinflationary equilibria (C62) |
| Brock's condition (I12) | Exclusion of hyperinflationary equilibria in discrete-time model (E19) |
| Infinitely negative utility when old (D15) | Exclusion of speculative hyperinflation in Brock and Scheinkman's model (E19) |
| Infeasibility condition not holding (C62) | Continuum of hyperinflationary equilibria exists (D59) |