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Learning as a rational foundation for macroeconomics and finance

  • Evans, George W

    (University of Oregon and University of Saint Andrews)

  • Honkapohja, Seppo

    ()

    (Bank of Finland)

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 with relevance 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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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1108.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2011.

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Length: 63 pages
Date of creation: 24 Mar 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_008
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. George W. Evans & Seppo Honkapohja, 2004. "Policy interaction, expectations and the liquidity trap," Macroeconomics 0404033, EconWPA.
  2. 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.
  3. Martin Ellison & Tony Yates, 2007. "Escaping Volatile Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 981-993, 06.
  4. 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.
  5. 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.
  6. Stefano Eusepi & Bruce Preston, 2008. "Expectations, Learning and Business Cycle Fluctuations," NBER Working Papers 14181, National Bureau of Economic Research, Inc.
  7. Adam, Klaus & Marcet, Albert & Nicolini, Juan Pablo, 2015. "Stock Market Volatility and Learning," Working Papers 720, Federal Reserve Bank of Minneapolis.
  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. James B. Bullard & Stefano Eusepi, 2004. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," Working Papers 2003-013, Federal Reserve Bank of St. Louis.
  10. Evans, George W. & Honkapohja, Seppo, 2002. "Monetary Policy, Expectations and Commitment," CEPR Discussion Papers 3434, C.E.P.R. Discussion Papers.
  11. 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.
  12. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2006. "More hedging instruments may destabilize markets," CeNDEF Working Papers 06-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  13. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
  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. 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.
  16. Evans, G.W. & Guse, E. & Honkapohja, S, 2007. "Liquidity Traps, Learning and Stagnation," Cambridge Working Papers in Economics 0732, Faculty of Economics, University of Cambridge.
  17. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
  18. Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," Finance and Economics Discussion Series 2003-41, Board of Governors of the Federal Reserve System (U.S.).
  19. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
  20. James B. Bullard, 2006. "The learnability criterion and monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 203-217.
  21. Hommes, Cars & Sorger, Gerhard, 1998. "Consistent Expectations Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 287-321, September.
  22. Pfajfar, D., 2012. "Formation of Rationally Heterogeneous Expectations," Discussion Paper 2012-083, Tilburg University, Center for Economic Research.
  23. Fourgeaud Claude & Gourieroux Christian & Pradel J, 1984. "Learning procedure and convergence to rationality," CEPREMAP Working Papers (Couverture Orange) 8411, CEPREMAP.
  24. repec:dgr:kubcen:2012083 is not listed on IDEAS
  25. 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.
  26. Roberto Ricciuti, 2003. "Assessing Ricardian Equivalence," Journal of Economic Surveys, Wiley Blackwell, vol. 17(1), pages 55-78, February.
  27. 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.
  28. George W. Evans & Roger Guesnerie & Bruce Mcgough, 2010. "Eductive stability in real business cycle models," PSE Working Papers halshs-00565011, HAL.
  29. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
  30. Ramon Marimon & Shyam Sunder, 1993. "Indeterminacy of equilibria in a hyperinflationary world: Experimental evidence," Economics Working Papers 25, Department of Economics and Business, Universitat Pompeu Fabra.
  31. Stefano Eusepi & Bruce Preston, 2007. "Central Bank Communication and Expectations Stabilization," Discussion Papers 0708-10, Columbia University, Department of Economics.
  32. 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.
  33. William Branch & George W. Evans & Bruce McGough, 2012. "Finite Horizon Learning," CDMA Working Paper Series 201204, Centre for Dynamic Macroeconomic Analysis.
  34. Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, vol. 117(520), pages 603-636, 04.
  35. 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.
  36. Agnieszka Markiewicz, 2010. "Monetary Policy, Model Uncertainty and Exchange Rate Volatility," CESifo Working Paper Series 2949, CESifo Group Munich.
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