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Ordinary Least Squares Learning And Nonlinearities In Macroeconomics

Listed author(s):
  • Orlando Gomes

The paper reviews the literature on adaptive learning in macroeconomic settings where the formation of expectations is particularly relevant. Special attention will be given to simple two-period overlapping generations models with a unique fixed point perfect foresight equilibrium; in this kind of scenario, eventual long-term periodic and a-periodic cycles are exclusively the result of the process of learning. The outcome that high rates of money growth have a potentially destabilizing effect generating periodic fluctuations and chaos is emphasized. The persistence of systematic forecast errors in a scenario where agents are supposed to act rationally is relevant in this context and it will be thoroughly discussed resorting to the notions of self-fulfilling mistakes, consistent expectations equilibria and beliefs equilibria. Copyright © 2009 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

Volume (Year): 24 (2010)
Issue (Month): 1 (02)
Pages: 52-84

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Handle: RePEc:bla:jecsur:v:24:y:2010:i:1:p:52-84
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