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Learning And International Transmission Shocks

  • Warwick J. McKibbin

    ()

  • Kang Yong Tan

    ()

This paper studies the implications of adaptive learning in the modelling of international linkages in a two-region MSG-Cubed (MSG3) model built on micro-founded behaviours of firms and households. The nature of the transmission process under rational expectations versus the adaptive learning methodology (evans and Honkapohja, 2001) is explored. We investigate the propagation mechanism within and across borders for various shocks and policy changes within the United States : change in inflation target, fiscal policy, productivity shock, and rise in equity risk. Adaptive learning is found to change the short run sign of transmission in all cases except for the inflation target shock. Learning could also resolve the quantity anomaly puzzle in the international RBC literature. The findings suggest the choice of expectations formation scheme is crucial in large-scale macroeconomic models.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-01.

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Length: 49 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:een:camaaa:2007-01
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  9. McKibbin, Warwick J & Vines, David, 2000. "Modelling Reality: The Need for Both Inter-temporal Optimization and Stickiness in Models for Policy-Making," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 106-37, Winter.
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  12. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
  13. Henderson, Dale W. & McKibbin, Warwick J., 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 221-317, December.
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