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Learning, Inflation Cycles, and Depression

Author

Listed:
  • Ryo Horii

    (Graduate School of Economics, Osaka University)

  • Yoshiyasu Ono

    (Institute of Social and Economic Research, Osaka University)

Abstract

This paper constructs a model that describes inflation cycles and prolonged depression as generated by the learning behavior of households who face a random liquidity shock in which money is needed. Households update the subjective probability of the shock based on the observation and change their liquidity preference accordingly. In this setting, we first derive a stationary cycles under perfect price adjustment, which is characterized by periods of gradual inflation and sudden sporadic falls of the price level. When the nominal stickiness is introduced, the liquidity shock is followed by a period of depression in which unemployment exists and deflation occurs gradually. Depression is deep and prolonged when the economy has experienced a long period of boom before encountering a liquidity shock.

Suggested Citation

  • Ryo Horii & Yoshiyasu Ono, 2006. "Learning, Inflation Cycles, and Depression," Discussion Papers in Economics and Business 06-14, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0614
    as

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0614.pdf
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    References listed on IDEAS

    as
    1. David Andolfatto & Paul Gomme, 2003. "Monetary Policy Regimes and Beliefs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 1-30, February.
    2. Potter Simon M., 2000. "A Nonlinear Model of the Business Cycle," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 4(2), pages 1-11, July.
    3. Martin Chalkley & In Ho Lee, 1998. "Learning and Asymmetric Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 623-645, July.
    4. Keith Sill & Jeffrey M. Wrase, 1999. "Exchange rates, monetary policy regimes, and beliefs," Working Papers 99-6, Federal Reserve Bank of Philadelphia.
    5. Ryo Horii & Yoshiyasu Ono, 2005. "Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations," Macroeconomics 0504016, University Library of Munich, Germany.
    6. Lee, I.H. & Chalkley, M., 1994. "Asymmetric business cycles," Discussion Paper Series In Economics And Econometrics 9411, Economics Division, School of Social Sciences, University of Southampton.
    7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bayesian Learning in Continuous Time; Hamilton-Jacobi-Bellman Equations; Markov Modulated Poisson Processes; Partial Delay Differential Equations; Liquidity Preference.;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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