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Adaptive learning with a unit root: An application to the current account

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  • Davies, Ronald B.
  • Shea, Paul

Abstract

This paper develops a simple two-country, two-good model of international trade and borrowing that suppresses all previous sources of current account dynamics. Under rational expectations, international debt follows a random walk. Under adaptive learning, however, the model's unit root is eliminated and international debt is either a stationary or an explosive process, depending on agents' specific learning algorithm. Some stationary learning algorithms result in debt following an AR(1) process with an autoregressive coefficient less than 0.8. Because unit roots are a common and problematic feature of many international business cycle models, our results offer a new approach for generating stationarity.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 2 (February)
Pages: 179-190

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:2:p:179-190

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Current account International debt movements Expectations Adaptive learning;

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  1. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
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  9. Barucci, Emilio & Landi, Leonardo, 1997. "Least mean squares learning in self-referential linear stochastic models," Economics Letters, Elsevier, vol. 57(3), pages 313-317, December.
  10. Evans, George W. & Honkapohja, S., 1998. "Stochastic gradient learning in the cobweb model," Economics Letters, Elsevier, vol. 61(3), pages 333-337, December.
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  12. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  13. Bhagwati, Jagdish N, 1969. "Optimal Policies and Immiserizing Growth," American Economic Review, American Economic Association, vol. 59(5), pages 967-70, December.
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