Escaping Nash inflation

An ordinary differential equation (ODE) gives the mean dynamics that govern the convergence to self-confirming equilibria of self-referential systems under discounted least squares learning, Another ODE governs escape dynamics that recurrently propel away from a self-confirming equilibrium. In a model with a unique self-confirming equilibrium, the escape dynamics make the government discover too strong a version of the natural rate hypothesis. The escape route dynamics cause recurrent outcomes close to the Ramsey (commitment) inflation rate in a model with an adaptive government. "If an unlikely event occurs, it is very likely to occur in the most likely way." Michael Harrison.