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Learning and Macroeconomics

Author

Listed:
  • George W. Evans
  • Seppo Honkapohja

    () (Department of Economics, University of Oregon, Eugene, Oregon 97403-1285, and School of Economics and Finance, University of St. Andrews, KY16 9AL Scotland
    Bank of Finland, PO Box 160, FI00101 Helsinki, Finland)

Abstract

Expectations play a central role in modern macroeconomic theories. The econometric learning approach models economic agents as forming expectations by estimating and updating forecasting models in real time. The learning approach provides a stability test for rational expectations and a selection criterion in models with multiple equilibria. In addition, learning provides new dynamics if older data are discounted, if models are misspecified, or if agents choose between competing models. This paper describes the expectational stability (E-stability) principle and the stochastic approximation tools used to assess equilibria under learning. Applications of learning to a number of areas are reviewed, including the design of monetary and fiscal policy, business cycles, self-fulfilling prophecies, hyperinflation, liquidity traps, and asset prices.

Suggested Citation

  • George W. Evans & Seppo Honkapohja, 2009. "Learning and Macroeconomics," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 421-451, May.
  • Handle: RePEc:anr:reveco:v:1:y:2009:p:421-451
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.economics.050708.142927
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    Keywords

    E-stability; stochastic approximation; persistent learning dynamics; business cycles; monetary policy; asset prices;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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