FSS-DECO Seminar: Incomplete information and self-fulfilling inflation dynamics: Lucas meets Keynes
Speaker: Prof. Yi WEN, Distinguished Professor of Economics, Antai College of Economics and Management, Shanghai Jiaotong University, China
Date: 11 February 2026 (Wednesday)
Time: 14:00-15:15
Venue: E21B-G002
Language: English
Abstract: This paper incorporates the Lucas (1973) island model into a standard DSGE framework. It demonstrates that self-fulfilling stochastic inflation equilibria, which are driven by intrinsic uncertainty or pure sentiments, can exist under rational expectations. Furthermore, it shows that these sentiment-driven stochastic equilibria exhibit monetary non-neutrality, even when the fundamental equilibrium is unique and monetarily neutral. As the aggregate price or inflation rate can appear to fluctuate independently of the money supply, our model explains the complex relationship between inflation and the money supply in the real world, where the basic quantity theory of money often seems invalid.
