Transformations of the State Variable and Learning Dynamics
This article studies dynamics in a model where agents forecast a one dimensional state variable via ordinary least squares regressions on the lagged values of the state variable. We study the stability properties of alternative transformations of the state variable that the agent can endogenously set forth. We study the consequences on the economy's stability of the typical transformations that an econometrician would attempt, such as differencing, detrending, or taking instantaneous concave transformations, such as logarithms. Surprisingly, for the considered class of economies, we found that these transformations are destabilizing, whereas alternative transformations, which an econometrician would never consider, such as convex transformations, are stabilizing. Therefore, we ironically find that in our set-up, an active agent, who is concerned about learning the economy's dynamics and, in an attempt to improve forecasting, transforms the state variable using the standard transformations, is more likely to deviate from the steady state than a passive agent.
|Date of creation:||Jan 2009|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +525 628 4197
Fax: +525 628 4058
Web page: http://cie.itam.mx/
More information through EDIRC
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.:
- Saari, Donald G. & Williams, Steven R., 1986. "On the local convergence of economic mechanisms," Journal of Economic Theory, Elsevier, vol. 40(1), pages 152-167, October.
- Lettau, Martin & Van Zandt, Timothy, 2001.
"Robustness of Adaptive Expectations as an Equilibrium Selection Device,"
CEPR Discussion Papers
2882, C.E.P.R. Discussion Papers.
- Lettau, M. & Van Zandt, T., 1995. "Robustness of Adaptive Expections as an Equilibrium Selection Device," Papers 9598, Tilburg - Center for Economic Research.
- Shurojit Chatterji, 1995.
"Temporary Eq'Uilibrium Dynamics With Bayesian Learning,"
Working Papers. Serie AD
1995-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Chatterji Shurojit, 1995. "Temporary Equilibrium Dynamics with Bayesian Learning," Journal of Economic Theory, Elsevier, vol. 67(2), pages 590-598, December.
- Bray, Margaret, 1982. "Learning, estimation, and the stability of rational expectations," Journal of Economic Theory, Elsevier, vol. 26(2), pages 318-339, April.
- Spear, Stephen E., 1985. "Rational expectations in the overlapping generations model," Journal of Economic Theory, Elsevier, vol. 35(2), pages 251-275, August.
- Van Zandt, Timothy & Lettau, Martin, 2003. "Robustness Of Adaptive Expectations As An Equilibrium Selection Device," Macroeconomic Dynamics, Cambridge University Press, vol. 7(01), pages 89-118, February.
- Chatterji, Shurojit & Chattopadhyay, Subir, 2000. "Global stability in spite of "local instability" with learning," Journal of Mathematical Economics, Elsevier, vol. 33(2), pages 155-165, March.
- George W. Evans & Seppo Honkapohja, .
"Economic Dynamics with Learning: New Stability Results,"
Computing in Economics and Finance 1997
51, Society for Computational Economics.
- Evans, George W & Honkapohja, Seppo, 1998. "Economic Dynamics with Learning: New Stability Results," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 23-44, January.
- Chatterji, Shurojit & Ghosal, Sayantan, 2004. "Local coordination and market equilibria," Journal of Economic Theory, Elsevier, vol. 114(2), pages 255-279, February.
- Frydman, Roman, 1982. "Towards an Understanding of Market Processes: Individual Expectations, Learning, and Convergence to Rational Expectations Equilibrium," American Economic Review, American Economic Association, vol. 72(4), pages 652-68, September.
- Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages S401-26, October.
- Lobato, Ignacio N, 2003. "Testing for Nonlinear Autoregression," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 164-73, January.
- Spear, Stephen E. & Srivastava, Sanjay, 1986. "Markov rational expectations equilibria in an overlapping generations model," Journal of Economic Theory, Elsevier, vol. 38(1), pages 35-62, February.
- Coulson, N Edward & Robins, Russell P, 1987. "A Test of the First Difference Transformation in Time Series Models," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 723-26, November.
- Grandmont Jean-michel & Laroque G, 1990. "Economic dynamics with learning : some instability examples," CEPREMAP Working Papers (Couverture Orange) 9007, CEPREMAP.
- Hellwig, Martin F., 1982. "Rational expectations and the Markov property of temporary equilibrium processes," Journal of Mathematical Economics, Elsevier, vol. 9(1-2), pages 135-144, January.
When requesting a correction, please mention this item's handle: RePEc:cie:wpaper:0902. 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: (Diego Dominguez)
If references are entirely missing, you can add them using this form.