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Finite Horizon Learning

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Author Info

  • William A. Branch

    ()
    (University of California, Irvine)

  • George W. Evans

    ()
    (University of Oregon Economics Department and University of St. Andrews)

  • Bruce McGough

    ()
    (Oregon State University)

Abstract

Incorporating adaptive learning into macroeconomics requires assumptions about how agents incorporate their forecasts into their decision-making. We develop a theory of bounded rationality that we call finite-horizon learning. This approach generalizes the two existing benchmarks in the literature: Euler equation learning, which assumes that consumption decisions are made to satisfy the one-step-ahead perceived Euler equation; and infinite-horizon learning, in which consumption today is determine optimally from an infinite-horizon optimization problem with given beliefs. In our approach, agents hold a finite forecasting/planning horizon. We find for the Ramsey model that the unique rational expectations equilibrium is E-stable at all horizons. However, transitional dynamics can differ significantly depending upon the horizon.

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File URL: http://economics.uoregon.edu/papers/UO-2010-15_Branch_Finite_Horizon_learning.pdf
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Bibliographic Info

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2010-15.

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Length: 23
Date of creation: 14 Nov 2010
Date of revision:
Handle: RePEc:ore:uoecwp:2010-15

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Keywords: Planning horizon; Expectations; Learning dynamics;

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References

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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.
  2. Roger Guesnerie, 2005. "Assessing Rational Expectations 2: "Eductive" Stability in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072580, January.
  3. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
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Cited by:
  1. Isabelle SALLE (GREThA, CNRS, UMR 5113) & Martin ZUMPE (GREThA, CNRS, UMR 5113) & Murat YILDIZOGLU (GREThA, CNRS, UMR 5113) & Marc-Alexandre SENEGAS (GREThA, CNRS, UMR 5113), 2012. "Modelling Social Learning in an Agent-Based New Keynesian Macroeconomic Model," Cahiers du GREThA 2012-20, Groupe de Recherche en Economie Théorique et Appliquée.
  2. Evans, George W. & Honkapohja, Seppo, 2011. "Learning as a Rational Foundation for Macroeconomics and Finance," CEPR Discussion Papers 8340, C.E.P.R. Discussion Papers.
  3. Hommes, Cars & Zhu, Mei, 2014. "Behavioral learning equilibria," Journal of Economic Theory, Elsevier, vol. 150(C), pages 778-814.
  4. Liam Graham, 2011. "Individual rationality, model-consistent expectations and learning," CDMA Working Paper Series 201112, Centre for Dynamic Macroeconomic Analysis.

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