Adaptive Learning and Cyclical Behavior of Output and Inflation

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Adaptive Learning and Cyclical Behavior of Output and Inflation

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Klaus Adam (Goethe University of Frankfurt)

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Klaus Adam

Abstract

This 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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Paper provided by EconWPA in its series Macroeconomics with number 0211013.

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Date of creation: 22 Nov 2002
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Handle: RePEc:wpa:wuwpma:0211013

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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

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-11-28 (All new papers)
NEP-EVO-2002-11-28 (Evolutionary Economics)

Cited by:
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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. [Downloadable!]
Klaus Adam, 2003. "Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices," CFS Working Paper Series 2003/03, Center for Financial Studies. [Downloadable!]
Other versions:
- Klaus Adam, 2003. "Learning and Equilibrium Selection in a Monetary Overlapping Generations Model with Sticky Prices," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 887-907, October. [Downloadable!] (restricted)

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This page was last updated on 2008-10-3.

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