IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Policy change and learning in the RBC model

  • Mitra, Kaushik
  • Evans, George W.
  • Honkapohja, Seppo

What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.

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.

File URL: http://www.sciencedirect.com/science/article/pii/S0165188913001176
Download Restriction: Full text for ScienceDirect subscribers only

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.

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 10 ()
Pages: 1947-1971

as
in new window

Handle: RePEc:eee:dyncon:v:37:y:2013:i:10:p:1947-1971
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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.:

as in new window
  1. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning and Business Cycle Fluctuations," NBER Working Papers 14181, National Bureau of Economic Research, Inc.
  2. Eric M. Leeper & Alexander W. Richter & Todd B. Walker, 2012. "Corrigendum: Quantitative Effects of Fiscal Foresight," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 283-283, August.
  3. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The output, employment, and interest rate effects of government consumption," Working Paper Series, Macroeconomic Issues 90-10, Federal Reserve Bank of Chicago.
  4. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Working Paper Series 0764, European Central Bank.
  5. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
  6. Marcet, A. & Nicolini, J.P., 1997. "Recurrent Hyperinflations and Learning," Papers 9721, Centro de Estudios Monetarios Y Financieros-.
  7. Christopher L. House & Matthew D. Shapiro, 2004. "Phased-In Tax Cuts and Economic Activity," Macroeconomics 0404009, EconWPA.
  8. Marianne Baxter & Robert G. King, 1991. "Productive externalities and business cycles," Discussion Paper / Institute for Empirical Macroeconomics 53, Federal Reserve Bank of Minneapolis.
  9. repec:bof:bofrdp:2012_005 is not listed on IDEAS
  10. Mitra , Kaushik & Evans , George W. & Honkapohja , Seppo, 2011. "Policy change and learning in the RBC model," Research Discussion Papers 22/2011, Bank of Finland.
  11. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  12. William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
    • William Poole & Robert H. Rasche, 2002. "Flation," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-6.
  13. Evans, George W. & Honkapohja, Seppo & Marimon, Ramon, 2001. "Convergence In Monetary Inflation Models With Heterogeneous Learning Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 5(01), pages 1-31, February.
  14. In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002. "Escaping Nash Inflation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 1-40.
  15. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  16. Ljungqvist, Lars & Sargent, Thomas J., 2012. "Recursive Macroeconomic Theory, Third Edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262018748, March.
  17. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
  18. Fabio Milani, 2011. "Expectation Shocks and Learning as Drivers of the Business Cycle," Economic Journal, Royal Economic Society, vol. 121(552), pages 379-401, 05.
  19. Kevin X. D. Huang & Zheng Liu & Tao Zha, 2008. "Learning, adaptive expectations, and technology shocks," Working Paper Series 2008-18, Federal Reserve Bank of San Francisco.
  20. Fabio Milani, 2005. "Expectations, Learning and Macroeconomic Persistence," Working Papers 050608, University of California-Irvine, Department of Economics.
  21. John Y. Campbell, 1992. "Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model," NBER Working Papers 4188, National Bureau of Economic Research, Inc.
  22. Azariadis, Costas & Bullard, James & Ohanian, Lee, 2004. "Trend-reverting fluctuations in the life-cycle model," Journal of Economic Theory, Elsevier, vol. 119(2), pages 334-356, December.
  23. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, edition 2, number 9780199210695, May.
  24. Strulik, Holger & Trimborn, Timo, 2010. "Anticipated tax reforms and temporary tax cuts: A general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2141-2158, October.
  25. Eric M. Leeper & Nora Traum & Todd B. Walker, 2011. "Clearing Up the Fiscal Multiplier Morass," NBER Working Papers 17444, National Bureau of Economic Research, Inc.
  26. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2007. "Anticipated Fiscal Policy and Adaptive Learning," CEPR Discussion Papers 6216, C.E.P.R. Discussion Papers.
  27. Stefano Eusepi & Bruce Preston, 2007. "Central Bank Communication and Expectations Stabilization," NBER Working Papers 13259, National Bureau of Economic Research, Inc.
  28. Eric M. Leeper & Alexander W. Richter & Todd B. Walker, 2012. "Quantitative Effects of Fiscal Foresight," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 115-44, May.
  29. George W. Evans & Seppo Honkapohja, . "Economic Dynamics with Learning: New Stability Results," Computing in Economics and Finance 1997 51, Society for Computational Economics.
  30. George W. Evans & Seppo Honkapohja & Kaushik Mitra, 2010. "Does Ricardian Equivalence Hold When Expectations are not Rational?," CDMA Working Paper Series 201008, Centre for Dynamic Macroeconomic Analysis.
  31. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
  32. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier.
  33. Ellison, Martin & Yates, Tony, 2007. "Escaping Nash and Volatile Inflation," CEPR Discussion Papers 6483, C.E.P.R. Discussion Papers.
  34. Morten O. Ravn & Karel Mertens, 2009. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy shocks," 2009 Meeting Papers 480, Society for Economic Dynamics.
  35. Athanasios Orphanides amd John Williams, 2001. "Monetary Policy with Imperfect Knowledge," Computing in Economics and Finance 2001 254, Society for Computational Economics.
  36. Chryssi Giannitsarou, 2004. "Supply-side reforms and learning dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 36, Money Macro and Finance Research Group.
  37. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," NBER Working Papers 14028, National Bureau of Economic Research, Inc.
  38. Thomas J Sargent, 2007. "Evolution and Intelligent Design," Levine's Bibliography 122247000000001821, UCLA Department of Economics.
  39. Beaudry, Paul & Portier, Franck, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," CEPR Discussion Papers 4628, C.E.P.R. Discussion Papers.
  40. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  41. Klaus Schmidt-Hebbel; & Carl E. Walsh, 2008. "Monetary Policy Under Uncertainty and Learning: An Overview," Working Papers Central Bank of Chile 509, Central Bank of Chile.
  42. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
  43. Mitra, Kaushik & Evans, George W. & Honkapohja, Seppo, 2012. "Fiscal Policy and Learning," SIRE Discussion Papers 2012-10, Scottish Institute for Research in Economics (SIRE).
  44. Carceles-Poveda, Eva & Giannitsarou, Chryssi, 2007. "Asset Pricing with Adaptive Learning," CEPR Discussion Papers 6223, C.E.P.R. Discussion Papers.
  45. Martin Ellison & Tony Yates, 2007. "Escaping Volatile Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 981-993, 06.
  46. King, R.G. & Baxter, M., 1990. "Fiscal Policy In General Equilibrium," RCER Working Papers 244, University of Rochester - Center for Economic Research (RCER).
  47. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, March.
  48. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November.
  49. Karel Mertens & Morten Overgaard Ravn, 2010. "Online Appendix to "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks"," Technical Appendices 09-221, Review of Economic Dynamics.
  50. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "What's News in Business Cycles," CEPR Discussion Papers 8984, C.E.P.R. Discussion Papers.
  51. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
  52. repec:inr:wpaper:2552 is not listed on IDEAS
  53. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, March.
  54. Wiliam Branch & George W. Evans, 2005. "A Simple Recursive Forecasting Model," University of Oregon Economics Department Working Papers 2005-3, University of Oregon Economics Department, revised 01 Feb 2005.
  55. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, vol. 80(6), pages 2733-2764, November.
  56. repec:bof:bofrdp:2011_022 is not listed on IDEAS
  57. Susan Yang, Shu-Chun, 2005. "Quantifying tax effects under policy foresight," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1557-1568, November.
  58. Alan J. Auerbach & William G. Gale & Benjamin H. Harris, 2010. "Activist Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 141-64, Fall.
  59. Bruce McGough, 2006. "Shocking Escapes," Economic Journal, Royal Economic Society, vol. 116(511), pages 507-528, 04.
  60. Eva Carceles-Poveda & Chryssi Giannitsarou, 2007. "Online Appendix to Asset Pricing with Adaptive Learning," Technical Appendices carceles08, Review of Economic Dynamics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:37:y:2013:i:10:p:1947-1971. 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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.