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Learning and Endogenous Business Cycles in a Standard Growth Model

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  • Laurent Cellarier
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    Abstract

    Cyclical or chaotic competitive equilibria that do not exist under perfect foresight are shown to occur in a decentralized growth model under constant gain adaptive learning. This paper considers an economy populated by boundedly rational households making one-period ahead constant gain adaptive input price forecasts, and using simple expectation rules to predict long-run physical capital holdings and consumption. Under these hypotheses, lifetime decisions are derived as time unfolds, and analytical solutions to the representative household's problem exist for a standard class of preferences. Under various characteristics of the model's functional forms, competitive equilibrium trajectories under learning may exhibit opposite local stability properties depending whether the underlying information set accommodates all contemporary data. Calibrated to the U.S. economy, the model with boundedly rational households may exhibit endogenous business cycles around the permanent regime which is a saddle point under perfect foresight

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    File URL: http://repec.org/sce2005/up.17100.1107126850.pdf
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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 240.

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    Date of creation: 11 Nov 2005
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    Handle: RePEc:sce:scecf5:240

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    Keywords: bounded rationality; constant gain adaptive learning; endogenous business cycles;

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    1. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
    2. James H. Stock & Mark W. Watson, 1998. "Business Cycle Fluctuations in U.S. Macroeconomic Time Series," NBER Working Papers 6528, National Bureau of Economic Research, Inc.
    3. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
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