Advanced Search
MyIDEAS: Login to save this paper or follow this series

Learning in an Estimated Small Open Economy Model

Contents:

Author Info

  • Jarkko Jääskelä

    (Reserve Bank of Australia)

  • Rebecca McKibbin

    (Reserve Bank of Australia)

Abstract

Expectations of the future play a key role in the transmission of monetary policy. Over recent years, a lot of theoretical and applied macroeconomic research has been based on the assumption of rational expectations. However, estimated models based on this assumption typically fail to capture the dynamics of the economy unless mechanical sources of persistence, such as habit formation in consumption and/or indexation to past prices, are imposed. This paper develops and estimates a small open economy model for Australia assuming two different types of expectations: rational expectations and learning. Learning – where expectations are formed by extrapolating from the historical data – can be an alternative means to generate the persistence observed in the data. The paper has four key findings. First, learning does not reduce the importance of conventional mechanical forms of persistence. Second, despite this, the model with learning is able to generate real exchange rate dynamics that are consistent with empirical models but which are absent in standard theoretical models. Third, there is some tentative evidence that learning is preferred over rational expectations in terms of fitting the data. Fourth, since the adoption of inflation targeting, agents appear to be using a longer history of data to form their expectations, consistent with greater stability of inflation.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.rba.gov.au/publications/rdp/2010/pdf/rdp2010-02.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2010-02.

as in new window
Length:
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:rba:rbardp:rdp2010-02

Contact details of provider:
Postal: GPO Box 3947, Sydney NSW 2001
Phone: 61-2-9551-8111
Fax: 61-2-9551-8000
Email:
Web page: http://www.rba.gov.au/
More information through EDIRC

Order Information:
Web: http://www.rba.gov.au/forms/rdp-order-form/

Related research

Keywords: Learning; expectations; new Keynesian model; regime shifts;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp2010-02. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.