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Policy change and learning in the RBC model

  • Mitra , Kaushik

    ()

    (School of Economics & Finance, University of St Andrews)

  • Evans , George W.

    (University of Oregon and University of St Andrews)

  • Honkapohja , Seppo

    ()

    (Bank of Finland)

What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Both permanent and temporary policy changes are analyzed. Dynamics under learning can have large impact effects and a gradual hump-shaped response, and tend to be prominently characterized by oscillations not present under rational expectations. These fluctuations reflect periods of excessive optimism or pessimism, followed by subsequent corrections.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1122.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 22/2011.

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Length: 62 pages
Date of creation: 10 Nov 2011
Date of revision:
Publication status: Published as Mitra, Kaushik, George W. Evans and Seppo Honkapohja, 'Policy change and learning in the RBC model' in Journal of Economic Dynamics and Control , 2013, pages 1947-1971.
Handle: RePEc:hhs:bofrdp:2011_022
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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