Finite Horizon Learning
AbstractIncorporating 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 determined 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.
Download InfoIf 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.
Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201204.
Date of creation: 25 Jan 2012
Date of revision:
Contact details of provider:
Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
Phone: 01334 462420
Fax: 01334 462444
Web page: http://www.st-andrews.ac.uk/cdma
More information through EDIRC
Planning horizon; bounded rationality; dynamic optimization; adaptive learning; Ramsey model.;
Other versions of this item:
- William A. Branch & George W. Evans & Bruce McGough, 2010. "Finite Horizon Learning," University of Oregon Economics Department Working Papers 2010-15, University of Oregon Economics Department.
- Branch, William & Evans, George W & McGough, Bruce, 2012. "Finite Horizon Learning," SIRE Discussion Papers 2012-16, Scottish Institute for Research in Economics (SIRE).
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-DGE-2012-07-01 (Dynamic General Equilibrium)
- NEP-FOR-2012-07-01 (Forecasting)
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.:
- Preston, Bruce, 2005.
"Learning about Monetary Policy Rules when Long-Horizon Expectations Matter,"
830, University Library of Munich, Germany.
- 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.
- Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," Working Paper 2003-18, Federal Reserve Bank of Atlanta.
- Roger Guesnerie, 2005. "Assessing Rational Expectations 2: "Eductive" Stability in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072580, June.
- Kaushik Mitra & James Bullard, .
"Learning About Monetary Policy Rules,"
00/41, Department of Economics, University of York.
- 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.
- Liam Graham, 2011. "Individual rationality, model-consistent expectations and learning," CDMA Working Paper Series 201112, Centre for Dynamic Macroeconomic Analysis.
- 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.
- Evans, George W & Honkapohja, Seppo, 2011. "Learning as a rational foundation for macroeconomics and finance," Research Discussion Papers 8/2011, Bank of Finland.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bram Boskamp).
If references are entirely missing, you can add them using this form.