Adaptive Learning and Cyclical Behavior of Output and Inflation
AbstractThis paper considers a sticky price model with a cash-in-advance constraint where agents forecast inflation rates with the help of econometric models. Agents use least squares learning to estimate two competing models of which one is consistent with rational expectations once learning is complete. When past performance governs the choice of forecast model, agents may prefer to use the inconsistent forecast model, which generates an equilibrium where forecasts are inefficient. While average output and inflation result the same as under rational expectations, higher moments differ substantially: output and inflation show persistence, inflation responds sluggishly to nominal disturbances, and the dynamic correlations of output and inflation match U.S. data surprisingly well.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0211013.
Date of creation: 22 Nov 2002
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Note: Type of Document - pdf; prepared on pc; figures: included
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Learning; Business Cycles; Rational Expectations; Inefficient Forecasts; Output and Inflation Persistence;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
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- Klaus Adam, 2003.
"Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices,"
Review of Economic Studies,
Oxford University Press, vol. 70(4), pages 887-907.
- Klaus Adam, 2003. "Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 887-907, October.
- Adam, Klaus, 2003. "Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices," CFS Working Paper Series 2003/03, Center for Financial Studies (CFS).
- Klaus Adam, 2004. "Should macroeconomists consider restricted perception equilibria? Evidence from the experimental laboratory," Computing in Economics and Finance 2004 338, Society for Computational Economics.
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