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Ordinary Least Squares Learning And Nonlinearities In Macroeconomics

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  • Orlando Gomes

Abstract

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.

Suggested Citation

  • Orlando Gomes, 2010. "Ordinary Least Squares Learning And Nonlinearities In Macroeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 52-84, February.
    • Handle: RePEc:bla:jecsur:v:24:y:2010:i:1:p:52-84
    DOI: 10.1111/j.1467-6419.2009.00580.x
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    Cited by:

    1. Gomes, Orlando, 2012. "Rational thinking under costly information—Macroeconomic implications," Economics Letters, Elsevier, vol. 115(3), pages 427-430.
    2. Ahmad Naimzada & Fabio Tramontana, 2010. "A Dynamic Model of a Boundedly Rational Consumer with a Simple Least Squared Learning Mechanism," Computational Economics, Springer;Society for Computational Economics, vol. 36(1), pages 47-56, June.

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