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A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous?

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  • Fabio Milani

    ()
    (Department of Economics, University of California-Irvine)

Abstract

This paper estimates a monetary DSGE model with learning introduced from the primitive assumptions. The model nests infinite-horizon learning and features, such as habit formation in consumption and inflation indexation, that are essential for the model fit under rational expectations. I estimate the DSGE model by Bayesian methods, obtaining estimates of the main learning parameter, the constant gain, jointly with the deep parameters of the economy. The results show that relaxing the assumption of rational expectations in favor of learning may render mechanical sources of persistence superfluous. In particular, learning appears a crucial determinant of inflation inertia.

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File URL: http://www.economics.uci.edu/files/economics/docs/workingpapers/2006-07/Milani-03.pdf
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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 060703.

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Length: 19 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:irv:wpaper:060703

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Keywords: Infinite-horizon learning; DSGE model; Bayesian estimation; Non-rational expectations; Inflation persistence; Habit formation;

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References

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  2. Preston, Bruce, 2008. "Adaptive learning and the use of forecasts in monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3661-3681, November.
  3. Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," Working Paper 2003-21, Federal Reserve Bank of Atlanta.
  4. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
  5. Milani, Fabio, 2008. "Learning, monetary policy rules, and macroeconomic stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3148-3165, October.
  6. Smets, Frank & Wouters, Rafael, 2004. "Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 4750, C.E.P.R. Discussion Papers.
  7. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
  8. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  9. Smets, Frank & Wouters, Raf, 2004. "Forecasting with a Bayesian DSGE model: an application to the euro area," Working Paper Series 0389, European Central Bank.
  10. Athanasios Orphanides & John C. Williams, 2002. "Imperfect knowledge, inflation expectations, and monetary policy," Finance and Economics Discussion Series 2002-27, Board of Governors of the Federal Reserve System (U.S.).
  11. Frank Smets & Raf Wouters, 2002. "Monetary policy in an estimated stochastic dynamic general equilibrium model of the Euro area," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  12. Marc Giannoni & Michael Woodford, 2004. "Optimal Inflation-Targeting Rules," NBER Chapters, in: The Inflation-Targeting Debate, pages 93-172 National Bureau of Economic Research, Inc.
  13. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Macroeconomics 0506013, EconWPA.
  14. Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
  15. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
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Citations

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Cited by:
  1. Chevillon, Guillaume & Massmann, Michael & Mavroeidis, Sophocles, 2010. "Inference in models with adaptive learning," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 341-351, April.
  2. Tim Taylor & Richard Harrison, 2008. "Misperceptions, heterogeneous expectations and macroeconomic dynamics," 2008 Meeting Papers 710, Society for Economic Dynamics.
  3. Krisztina Molnár & Sergio Santoro, 2010. "Optimal Monetary Policy When Agents Are Learning," Working Paper 2010/08, Norges Bank.
  4. Timothy Cogley & Argia M. Sbordone, 2006. "Trend inflation and inflation persistence in the New Keynesian Phillips curve," Staff Reports 270, Federal Reserve Bank of New York.
  5. Fabio Milani, 2009. "Expectations, Learning, and the Changing Relationship between Oil Prices and the Macroeconomy," Working Papers 080923, University of California-Irvine, Department of Economics.
  6. Bask, Mikael & Selander, Carina, 2007. "Robust Taylor rules in an open economy with heterogeneous expectations and least squares learning," Research Discussion Papers 6/2007, Bank of Finland.
  7. Milani, Fabio, 2011. "The impact of foreign stock markets on macroeconomic dynamics in open economies: A structural estimation," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 111-129, February.
  8. Fazzari, Steven M. & Ferri, Piero & Greenberg, Edward, 2010. "Investment and the Taylor rule in a dynamic Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2010-2022, October.
  9. Slobodyan, Sergey & Wouters, Raf, 2012. "Learning in an estimated medium-scale DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 26-46.
  10. John M. Roberts, 2007. "Learning, Sticky Inflation, and the Sacrifice Ratio," Kiel Working Papers 1365, Kiel Institute for the World Economy.
  11. Fabio Milani, 2009. "The Effect of Global Output on U.S. Inflation and Inflation Expectations: A Structural Estimation," Working Papers 080920, University of California-Irvine, Department of Economics.
  12. Claudio Borio & Piti Disyatat & Mikael Juselius, 2014. "A parsimonious approach to incorporating economic information in measures of potential output," BIS Working Papers 442, Bank for International Settlements.
  13. Fabio Milani, 2006. "The Evolution of the Fed's Inflation Target in an Estimated Model under RE and Learning," Working Papers 060704, University of California-Irvine, Department of Economics.

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