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Least squares learning and business cycles

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  • Cellarier, Laurent L.

Abstract

This paper investigates whether the neoclassical growth framework augmented with least squares estimated heuristic rules may reproduce U.S. business cycles. I consider various assumptions about the length of the information set, the influence of contemporaneous data on current forecasts, and the limit case in which learning is completed. Calibrated to the U.S. economy, this model may generate endogenous business cycles that do not exist under perfect foresight. If random productivity shocks are introduced, then the model is more volatile than under rational expectations or constant gain learning and reproduces some key U.S. business cycles stylized facts.

Suggested Citation

  • Cellarier, Laurent L., 2008. "Least squares learning and business cycles," Journal of Economic Behavior & Organization, Elsevier, vol. 68(3-4), pages 553-564, December.
  • Handle: RePEc:eee:jeborg:v:68:y:2008:i:3-4:p:553-564
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    References listed on IDEAS

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    1. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.),Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64, Elsevier.
    2. Cellarier, Laurent, 2006. "Constant gain learning and business cycles," Journal of Macroeconomics, Elsevier, vol. 28(1), pages 51-85, March.
    3. Bullard James, 1994. "Learning Equilibria," Journal of Economic Theory, Elsevier, vol. 64(2), pages 468-485, December.
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    6. Fourgeaud, Claude & Gourieroux, Christian & Pradel, Jacqueline, 1986. "Learning Procedures and Convergence to Rationality," Econometrica, Econometric Society, vol. 54(4), pages 845-868, July.
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    8. Van Zandt, Timothy & Lettau, Martin, 2003. "Robustness Of Adaptive Expectations As An Equilibrium Selection Device," Macroeconomic Dynamics, Cambridge University Press, vol. 7(1), pages 89-118, February.
    9. Herbert Dawid, 2005. "Long horizon versus short horizon planning in dynamic optimization problems with incomplete information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(3), pages 575-597, April.
    10. Kenneth Matheny & Charles Noussair, 2000. "An experimental study of decisions in dynamic optimization problems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 15(2), pages 389-419.
    11. Dawid, Herbert & Day, Richard H., 2007. "On sustainable growth and collapse: Optimal and adaptive paths," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2374-2397, July.
    12. 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.
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    Cited by:

    1. Piero Ferri, 2011. "Macroeconomics of Growth Cycles and Financial Instability," Books, Edward Elgar Publishing, number 14260, September.
    2. Doshchyn, Artur & Giommetti, Nicola, 2013. "Learning, Expectations, and Endogenous Business Cycles," MPRA Paper 49617, University Library of Munich, Germany.

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