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Rational expectations and near rational alternatives: How best to form expectations

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  • Beeby, Mike
  • Hall, Stephan George
  • Henry, Brian S.

Abstract

Learning rules are increasingly being used in macroeconomic models. However one criticism that has been levelled at this assumption is that the choice of variables for inclusion in the learning rule, and the actual specification of the learning rule itself, is arbitrary. In this paper we test how important the particular learning rule specification is by incorporating a battery of learning rules into a large-scale macro model. The model's dynamics are then compared to those from a version of the model simulated under rational expectations (RE). The results indicate that although there are large differences between the RE solution and each of the solutions under learning, differences amongst the learning rule solutions are minor JEL Classification: C53, E43, F33

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0086.

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Date of creation: Nov 2001
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Handle: RePEc:ecb:ecbwps:20010086

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  1. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-44, December.
  2. Garratt, Anthony & Hall, Stephen G., 1997. "E-equilibria and adaptive expectations: Output and inflation in the LBS model," Journal of Economic Dynamics and Control, Elsevier, vol. 21(7), pages 1149-1171, June.
  3. Evans, George W. & Honkapohja, Seppo, 1999. "Learning dynamics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 7, pages 449-542 Elsevier.
  4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  5. Fourgeaud Claude & Gourieroux Christian & Pradel J, 1984. "Learning procedure and convergence to rationality," CEPREMAP Working Papers (Couverture Orange) 8411, CEPREMAP.
  6. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
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Cited by:
  1. Basdevant, Olivier, 2005. "Learning process and rational expectations: An analysis using a small macro-economic model for New Zealand," Economic Modelling, Elsevier, vol. 22(6), pages 1074-1089, December.
  2. Olivier Basdevant, 2003. "Learning process and rational expectations: an analysis using a small macroeconomic model for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/05, Reserve Bank of New Zealand.

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