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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. Evans, George W. & Guse, Eran & Honkapohja, Seppo, 2007. "Liquidity Traps, Learning and Stagnation," CEPR Discussion Papers 6355, C.E.P.R. Discussion Papers.
  2. Laibson, David I. & Fuster, Andreas & Mendel, Brock, 2010. "Natural Expectations and Macroeconomic Fluctuations," Scholarly Articles 9938147, Harvard University Department of Economics.
  3. Honkapohja, S. & Evans, G.W., 2000. "Expectations and the Stability Problem for Optimal Monetary Policies," University of Helsinki, Department of Economics 481, Department of Economics.
  4. Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," Working Paper Series 2003-11, Federal Reserve Bank of San Francisco.
  5. David L. Reifschneider & John C. Williams, 1999. "Three lessons for monetary policy in a low inflation era," Finance and Economics Discussion Series 1999-44, Board of Governors of the Federal Reserve System (U.S.).
  6. George W. Evans & Seppo Honkapohja, 2006. "Monetary Policy, Expectations and Commitment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(1), pages 15-38, 03.
  7. Stefano Eusepi & Bruce Preston, 2011. "Expectations, Learning, and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 101(6), pages 2844-72, October.
  8. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
  9. Florian Wagener & Cars Hommes & William Brock, 2006. "More hedging instruments may destabilize markets," Working Papers wp06-11, Warwick Business School, Finance Group.
  10. 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.
  11. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
  12. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  13. Evans, George W. & Honkapohja, Seppo, 1996. "Least squares learning with heterogeneous expectations," Economics Letters, Elsevier, vol. 53(2), pages 197-201, November.
  14. 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.
  15. Athanasios Orphanides & John C. Williams, 2003. "The decline of activist stabilization policy: natural rate misperceptions, learning, and expectations," Working Paper Series 2003-24, Federal Reserve Bank of San Francisco.
  16. George W. Evans & Roger Guesnerie & Bruce Mcgough, 2010. "Eductive stability in real business cycle models," PSE Working Papers halshs-00565011, HAL.
  17. 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.
  18. Pfajfar, D., 2012. "Formation of Rationally Heterogeneous Expectations," Discussion Paper 2012-083, Tilburg University, Center for Economic Research.
  19. Adam, Klaus & Marcet, Albert & Nicolini, Juan Pablo, 2008. "Stock market volatility and learning," Working Paper Series 0862, European Central Bank.
  20. Fourgeaud, Claude & Gourieroux, Christian & Pradel, Jacqueline, 1986. "Learning Procedures and Convergence to Rationality," Econometrica, Econometric Society, vol. 54(4), pages 845-68, July.
  21. 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.
  22. Giorgio E. Primiceri, 2006. "Why Inflation Rose and Fell: Policy-Makers' Beliefs and U. S. Postwar Stabilization Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(3), pages 867-901.
  23. Adam, Klaus, 2005. "Experimental Evidence on the Persistence of Output and Inflation," CEPR Discussion Papers 4885, C.E.P.R. Discussion Papers.
  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. Marimon, Ramon & Sunder, Shyam, 1993. "Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence," Econometrica, Econometric Society, vol. 61(5), pages 1073-107, September.
  26. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
  27. Chakraborty, Avik & Evans, George W., 2008. "Can perpetual learning explain the forward-premium puzzle?," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 477-490, April.
  28. 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.
  29. 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.
  30. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  31. Giuseppe Ferrero & Alessandro Secchi, 2010. "Central bank’s macroeconomic projections and learning," National Bank of Poland Working Papers 72, National Bank of Poland, Economic Institute.
  32. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
  33. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
  34. 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.
  35. George W. Evans & Seppo Honkapohja, 2003. "Policy interaction, expectations, and the liquidity trap," FRB Atlanta Working Paper 2003-16, Federal Reserve Bank of Atlanta.
  36. Agnieszka Markiewicz, 2010. "Monetary Policy, Model Uncertainty and Exchange Rate Volatility," CESifo Working Paper Series 2949, CESifo Group Munich.
  37. Hommes, Cars & Sorger, Gerhard, 1998. "Consistent Expectations Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 287-321, September.
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