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Learning, Adaptive Expectations and Technology Shocks

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  • Kevin X.D. Huang
  • Zheng Liu
  • Tao Zha

Abstract

This study explores the macroeconomic implications of adaptive expectations in a standard growth model. We show that the self‐confirming equilibrium under adaptive expectations is the same as the steady state rational expectations equilibrium for all admissible parameter values, but that dynamics around the steady state are substantially different between the two equilibria. The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by escapes emphasised by Williams (2003). Consequently, adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labour market dynamics.

Suggested Citation

  • Kevin X.D. Huang & Zheng Liu & Tao Zha, 2009. "Learning, Adaptive Expectations and Technology Shocks," Economic Journal, Royal Economic Society, vol. 119(536), pages 377-405, March.
  • Handle: RePEc:wly:econjl:v:119:y:2009:i:536:p:377-405
    DOI: 10.1111/j.1468-0297.2008.02238.x
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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