Economic Theory Commons^™

Temporary Equilibrium Dynamics With Bayesian Learning, Shurojit Chatterji

Research Collection School Of Economics

This paper examines the stability of deterministic steady states in a class of economies where the state variable is one dimensional and where agents use Bayesian techniques to form expectations. The dynamics with learning are locally convergent if the prior mean is close to a stable perfect-foresight root having modulus less than 1 and if the prior beliefs are held with enough confidence. The dynamics are, however, divergent if the prior mean or the variance of the prior distribution is sufficiently large