Adaptive learning with a unit root: An application to the current account
This paper develops a simple two-country, two-good model of international trade and borrowing that suppresses all previous sources of current account dynamics. Under rational expectations, international debt follows a random walk. Under adaptive learning, however, the model's unit root is eliminated and international debt is either a stationary or an explosive process, depending on agents' specific learning algorithm. Some stationary learning algorithms result in debt following an AR(1) process with an autoregressive coefficient less than 0.8. Because unit roots are a common and problematic feature of many international business cycle models, our results offer a new approach for generating stationarity.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jagdish Bhagwati & Arvind Panagariya & T. N. Srinivasan, 1998. "Lectures on International Trade, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522470, June.
- Schmitt-Grohé, Stephanie & Uribe, Martín, 2002.
"Closing Small Open Economy Models,"
CEPR Discussion Papers
3096, C.E.P.R. Discussion Papers.
- Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
- Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
- Marc-Andre Letendre, 2000. "Linear Approximation Methods and International Real Business Cycles with Incomplete Asset Markets," Econometric Society World Congress 2000 Contributed Papers 1539, Econometric Society.
- Preston, Bruce, 2005.
"Learning about Monetary Policy Rules when Long-Horizon Expectations Matter,"
830, University Library of Munich, Germany.
- Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
- Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," Working Paper 2003-18, Federal Reserve Bank of Atlanta.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
- Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
- Kenneth Kasa, 2004.
"Learning, Large Deviations, And Recurrent Currency Crises,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 141-173, 02.
- Kenneth Kasa, 2000. "Learning, large deviations, and recurrent currency crises," Working Paper Series 2000-10, Federal Reserve Bank of San Francisco.
- Dotsey, Michael & Mao, Ching Sheng, 1992. "How well do linear approximation methods work? : The production tax case," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 25-58, February.
- In-Koo Cho & Kenneth Kasa, 2003.
"Learning Dynamics and Endogenous Currency Crises,"
Computing in Economics and Finance 2003
132, Society for Computational Economics.
- Harold L. Cole & Maurice Obstfeld, 1989.
"Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?,"
NBER Working Papers
3027, National Bureau of Economic Research, Inc.
- Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
- Evans, George W. & Honkapohja, S., 1998.
"Stochastic gradient learning in the cobweb model,"
Elsevier, vol. 61(3), pages 333-337, December.
- Bhagwati, Jagdish N, 1969. "Optimal Policies and Immiserizing Growth," American Economic Review, American Economic Association, vol. 59(5), pages 967-70, December.
- Barucci, Emilio & Landi, Leonardo, 1997. "Least mean squares learning in self-referential linear stochastic models," Economics Letters, Elsevier, vol. 57(3), pages 313-317, December.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:34:y:2010:i:2:p:179-190. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.