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Escape Dynamics : A Continuous Time Approximation

Author

Listed:
  • Dmitri Kolyuzhnov
  • Anna Bogomolova

Abstract

We use a continuous-time approximation approach to analyze dynamics of a model where government adaptively learns the Phillips curve while running monetary policy (Phellps problem). This approach is based on approximating the discrete-time dynamics with learning by a limiting continuous-time diffusion and subsequent characterization of the escape dynamics (recurrent excursions from the neighborhood of equilibrium) for this limit process. We characterize escape dynamics by analytically deriving dominant escape path and expected escape time. We discuss the average behavior of the learning process (the mean dynamics) and its relationship to the escape dynamics. Finally, we discuss the appropriateness of our approximation for the parameterizations of the learning which are commonly used in the literature.

Suggested Citation

  • Dmitri Kolyuzhnov & Anna Bogomolova, 2005. "Escape Dynamics : A Continuous Time Approximation," Computing in Economics and Finance 2005 162, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:162
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    More about this item

    Keywords

    Large deviations; Stochastic Approximation; Escape Dynamics; Adaptive Learning;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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