Existence and stability of rational expectation-equilibria in a simple overlapping generation model

Abstract

We consider a simple overlapping generation model with outside money and one consumption good. For a big class of preference relations, it is shown that globally no self-fulfilling expectation exists (except the trivial one) if the information set contains only past and present prices. Even locally, positive results can be obtained for homothetic preferences only. To get asymptotic stability this class must be restricted again: The elasticity of substitution must be very small. The implications of this are very negative: A Learning process can never reach rationality.