Beliefs equilibria in an overlapping generations model

We consider a standard two generations version of the overlapping generations model. Agents predict inflation rates on the basis of a perceived law of motion, which is estimated by running a linear regression on past inflation rates. We introduce the notion of beliefs equilibrium. At such an equilibrium: (i) the perceived law of motion is such that it fits the time series of inflation rates best, and (ii) this time series of actual inflation rates is generated when agents use that perceived law of motion. We show that beliefs might converge, although inflation rates keep on fluctuating. These fluctuations are consistent with the limit belief. (C) 2003 Elsevier Science B.V. All rights reserved.