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Learning as a Rational Foundation for Macroeconomics and Finance

  • Evans, George W.
  • Honkapohja, Seppo

Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for RE equilibria and a selection criterion in models with multiple equilibria. Further features of learning, such as discounting of older data, use of misspecified models, or heterogeneous choice by agents between competing models, generate novel learning dynamics. Empirical applications are reviewed and the roles of the planning horizon and structural knowledge are discussed. We develop several applications of learning to macroeconomic policy: the scope of Ricardian equivalence, appropriate specification of interest-rate rules, implementation of price-level targeting to achieve learning-stability of the optimal RE equilibrium and whether under learning price-level targeting can rule out the deflation trap at the zero-lower-bound.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8340.

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Date of creation: Apr 2011
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Handle: RePEc:cpr:ceprdp:8340
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  1. Agnieszka Markiewicz, 2010. "Monetary Policy, Model Uncertainty and Exchange Rate Volatility," CESifo Working Paper Series 2949, CESifo Group Munich.
  2. James Bullard & Stefano Eusepi, 2005. "Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 324-359, April.
  3. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, 03.
  4. William A. Branch & George W. Evans & Bruce McGough, 2010. "Finite Horizon Learning," University of Oregon Economics Department Working Papers 2010-15, University of Oregon Economics Department.
  5. Klaus Adam & Albert Marcet & Juan Pablo Nicolini, 2014. "Stock Market Volatility and Learning," Working Papers 336, Barcelona Graduate School of Economics.
  6. Adam, Klaus, 2005. "Experimental Evidence on the Persistence of Output and Inflation," CEPR Discussion Papers 4885, C.E.P.R. Discussion Papers.
  7. William A. Branch & George W. Evans, 2010. "Asset Return Dynamics and Learning," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1651-1680, April.
  8. Giuseppe Ferrero & Alessandro Secchi, 2010. "Central banks' macroeconomic projections and learning," Temi di discussione (Economic working papers) 782, Bank of Italy, Economic Research and International Relations Area.
  9. Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," Working Paper 2003-21, Federal Reserve Bank of Atlanta.
  10. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  11. George Evans & Eran Guse & Seppo Honkapohja, 2007. "Liquidity Traps, Learning and Stagnation," Kiel Working Papers 1341, Kiel Institute for the World Economy.
  12. Evans, George W. & Honkapohja , Seppo, 2003. "Policy interaction, expectations and the liquidity trap," Research Discussion Papers 22/2003, Bank of Finland.
  13. Sargent, Thomas J., 1991. "Equilibrium with signal extraction from endogenous variables," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 245-273, April.
  14. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  15. Fourgeaud, Claude & Gourieroux, Christian & Pradel, Jacqueline, 1986. "Learning Procedures and Convergence to Rationality," Econometrica, Econometric Society, vol. 54(4), pages 845-68, July.
  16. Florian Wagener & Cars Hommes & William Brock, 2006. "More hedging instruments may destabilize markets," Working Papers wp06-11, Warwick Business School, Finance Group.
  17. George W. Evans & Roger Guesnerie & Bruce McGough, 2014. "Eductive Stability in Real Business Cycle Models," CDMA Working Paper Series 201406, Centre for Dynamic Macroeconomic Analysis.
  18. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," Working Paper 2003-18, Federal Reserve Bank of Atlanta.
  19. Honkapohja, Seppo & Evans, George W., 2000. "Expectations and the stability problem for optimal monetary policies," Discussion Paper Series 1: Economic Studies 2000,10, Deutsche Bundesbank, Research Centre.
  20. Guse, Eran A., 2005. "Stability properties for learning with heterogeneous expectations and multiple equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1623-1642, October.
  21. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning And Business Cycle Fluctuations," CAMA Working Papers 2008-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  22. Emiliano Santoro & Damjan Pfajfar, 2006. "Heterogeneity and learning in inflation expectation formation: an empirical assessment," Department of Economics Working Papers 0607, Department of Economics, University of Trento, Italia.
  23. George W. Evans & Avik Chakraborty, 2006. "Can Perpetual Learning Explain the Forward Premium Puzzle?," University of Oregon Economics Department Working Papers 2006-8, University of Oregon Economics Department, revised 20 Aug 2006.
  24. Martin Ellison & Tony Yates, 2007. "Escaping Volatile Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 981-993, 06.
  25. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
  26. Marimon, Ramon & Sunder, Shyam, 1993. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica, Econometric Society, vol. 61(5), pages 1073-107, September.
  27. Hommes, Cars & Sorger, Gerhard, 1998. "Consistent Expectations Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 287-321, September.
  28. Andreas Fuster & David Laibson & Brock Mendel, 2010. "Natural Expectations and Macroeconomic Fluctuations," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 67-84, Fall.
  29. Stefano Eusepi & Bruce Preston, 2007. "Central Bank Communication and Expectations Stabilization," Discussion Papers 0708-10, Columbia University, Department of Economics.
  30. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
  31. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2006. "The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model," Bank of England working papers 303, Bank of England.
  32. Giorgio Primiceri, 2005. "Why Inflation Rose and Fell: Policymakers' Beliefs and US Postwar Stabilization Policy," NBER Working Papers 11147, National Bureau of Economic Research, Inc.
  33. Pfajfar, D., 2012. "Formation of Rationally Heterogeneous Expectations," Discussion Paper 2012-083, Tilburg University, Center for Economic Research.
  34. repec:dgr:kubcen:2012083 is not listed on IDEAS
  35. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
  36. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
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