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Learning as a rational foundation for macroeconomics and finance

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Author Info

  • Evans, George W

    (University of Oregon and University of Saint Andrews)

  • Honkapohja, Seppo

    ()
    (Bank of Finland)

Abstract

Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for RE equilibria and a selection criterion in models with multiple equilibria. Further features of learning – such as discounting of older data, use of misspecified models or heterogeneous choice by agents between competing models – generate novel learning dynamics. Empirical applications are reviewed and the roles of the planning horizon and structural knowledge are discussed. We develop several applications of learning with relevance to macroeconomic policy: the scope of Ricardian equivalence, appropriate specification of interest-rate rules, implementation of price-level targeting to achieve learning stability of the optimal RE equilibrium and whether, under learning, price-level targeting can rule out the deflation trap at the zero lower bound.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2011.

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Length: 63 pages
Date of creation: 24 Mar 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_008

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: cognitive consistency; E-stability; least-squares; persistent learning dynamics; business cycles; monetary policy; asset prices;

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References

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  1. George W. Evans & Seppo Honkapohja, 2003. "Policy interaction, expectations, and the liquidity trap," Working Paper 2003-16, Federal Reserve Bank of Atlanta.
  2. Adam, Klaus, 2005. "Experimental evidence on the persistence of output and inflation," Working Paper Series 0492, European Central Bank.
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  7. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 807-824, October.
  8. Branch, William & Evans, George W & McGough, Bruce, 2012. "Finite Horizon Learning," SIRE Discussion Papers 2012-16, Scottish Institute for Research in Economics (SIRE).
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  25. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2006. "The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model," Bank of England working papers 303, Bank of England.
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  29. Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
  30. George W. Evans & Avik Chakraborty, 2006. "Can Perpetual Learning Explain the Forward Premium Puzzle?," University of Oregon Economics Department Working Papers 2006-8, University of Oregon Economics Department, revised 20 Aug 2006.
  31. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
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  1. [??]?????????
    by himaginary in himaginaryの日記 on 2012-11-11 08:00:00
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Cited by:
  1. Uehara, Takuro, 2013. "Ecological threshold and ecological economic threshold: Implications from an ecological economic model with adaptation," Ecological Economics, Elsevier, vol. 93(C), pages 374-384.
  2. Steinar Holden, 2012. "Implications of insights from behavioral economics for macroeconomic models," IMK Working Paper 99-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  3. Bovi, Maurizio, 2013. "Are the representative agent’s beliefs based on efficient econometric models?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 633-648.
  4. George W. Evans, 2011. "Comment on "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing"," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 61-71 National Bureau of Economic Research, Inc.
  5. Crowley , Patrick M & Hughes Hallett, Andrew, 2011. "The great moderation under the microscope: decomposition of macroeconomic cycles in US and UK aggregate demand," Research Discussion Papers 13/2011, Bank of Finland.

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