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Learning, Inflation Cycles, and Depression

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Author Info
Ryo Horii () (Graduate School of Economics, Osaka University)
Yoshiyasu Ono () (Institute of Social and Economic Research, Osaka University)

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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.

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Publisher Info
Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 06-14.

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Length: 28 pages
Date of creation: May 2006
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Handle: RePEc:osk:wpaper:0614

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Web page: http://www.econ.osaka-u.ac.jp/
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Related research
Keywords: Bayesian Learning in Continuous Time Hamilton-Jacobi-Bellman Equations Markov Modulated Poisson Processes Partial Delay Differential Equations Liquidity Preference.

Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Keith Sill & Jeff Wrase, 2000. "Exchange Rates, Monetary Policy Regimes, and Beliefs," Econometric Society World Congress 2000 Contributed Papers 1701, Econometric Society. [Downloadable!]
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  2. Ryo Horii & Yoshiyasu Ono, 2005. "Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations," Macroeconomics 0504016, EconWPA. [Downloadable!]
  3. 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.
  4. Simon Potter, 2000. "A Nonlinear Model of the Business Cycle," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 4(2), pages 95-100. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
    Other versions:
  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
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