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Adaptive Learning and Macroeconomic Inertia in the Euro Area

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  • FABIO MILANI

Abstract

This article aims to study the determinants of macroeconomic inertia in the euro area. To this end, it estimates a simple monetary DSGE model with private‐sector learning, but which also includes more structural sources of inertia, such as habit formation in consumption and inflation indexation. Economic agents are assumed to form near‐rational expectations and to learn the model parameters over time. Likelihood‐based Bayesian methods are used to estimate the agents' beliefs jointly within the system and to provide evidence on the fit of alternative learning rules. The results show that European macroeconomic inertia has only moderately changed over the sample. The evidence is consistent with a small gain coefficient and low degrees of habits and indexation, although some uncertainty remains after the estimation.

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  • Fabio Milani, 2009. "Adaptive Learning and Macroeconomic Inertia in the Euro Area," Journal of Common Market Studies, Wiley Blackwell, vol. 47(3), pages 579-599, June.
    • Handle: RePEc:bla:jcmkts:v:47:y:2009:i:3:p:579-599
    DOI: 10.1111/j.1468-5965.2009.01816.x
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    2. Chen, Shu-Heng & Chang, Chia-Ling & Wen, Ming-Chang, 2014. "Social networks and macroeconomic stability," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-40.
    3. Chang, Chia-ling & Chen, Shu-heng, 2011. "Interactions in DSGE models: The Boltzmann-Gibbs machine and social networks approach," Economics Discussion Papers 2011-25, Kiel Institute for the World Economy (IfW Kiel).
    4. Bas van Aarle & Bas Van Aarle, 2012. "Macroeconomic Fluctuations in a Stylized DSGE Model with Disequilibrium Dynamics," CESifo Working Paper Series 4017, CESifo.
    5. Jerger, Jürgen & Röhe, Oke, 2009. "Testing for Parameter Stability in DSGE Models. The Cases of France, Germany and Spain," University of Regensburg Working Papers in Business, Economics and Management Information Systems 453, University of Regensburg, Department of Economics.
    6. Dieppe, Alistair & Pandiella, Alberto González & Hall, Stephen & Willman, Alpo, 2013. "Limited information minimal state variable learning in a medium-scale multi-country model," Economic Modelling, Elsevier, vol. 33(C), pages 808-825.
    7. Kobielarz, Michal, 2018. "The economics of monetary unions," Other publications TiSEM b0293536-68ec-4905-bffd-6, Tilburg University, School of Economics and Management.
    8. Jürgen Jerger & Oke Röhe, 2014. "Testing for parameter stability in DSGE models. The cases of France, Germany, Italy, and Spain," International Economics and Economic Policy, Springer, vol. 11(3), pages 329-351, September.
    9. Fabio Milani, 2012. "The Modeling of Expectations in Empirical DSGE Models: A Survey," Advances in Econometrics, in: DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments, pages 3-38, Emerald Group Publishing Limited.
    10. Chen, Shu-Heng & Chang, Chia-Ling & Tseng, Yi-Heng, 2014. "Social networks, social interaction and macroeconomic dynamics: How much could Ernst Ising help DSGE?," Research in International Business and Finance, Elsevier, vol. 30(C), pages 312-335.
    11. Bas Aarle, 2017. "Macroeconomic fluctuations in a New Keynesian disequilibrium model," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 6(1), pages 1-20, December.
    12. Warne, Anders, 2023. "DSGE model forecasting: rational expectations vs. adaptive learning," Working Paper Series 2768, European Central Bank.

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