Initial Expectations in New Keynesian Models with Learning
This paper examines how the estimation results for a standard New Keynesian model with constant gain least squares learning is sensitive to the stance taken on agents beliefs at the beginning of the sample. The New Keynesian model is estimated under rational expectations and under learning with three different frameworks for how expectations are set at the beginning of the sample. The results show that initial beliefs can have an impact on the predictions of an estimated model; in fact previous literature has exposed this sensitivity to explain the changing volatilities of output and inflation in the post-war United States. The results indicate statistical evidence for adaptive learning, however the rational expectations framework performs at least as well as the learning frameworks, if not better, in in-sample and out-of-sample forecast error criteria. Moreover, learning is not found to better explain time varying macroeconomic volatility any better than rational expectations. Finally, impulse response functions from the estimated models show that the dynamics following a structural shock can depend crucially on how expectations are initialized and what information agents are assumed to have.
|Date of creation:||Jun 2008|
|Date of revision:|
|Contact details of provider:|| Postal: 812-855-1021|
Web page: http://www.iub.edu/~caepr
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Athanasios Orphanides & John C. Williams, 2003.
"Inflation scares and forecast-based monetary policy,"
Working Paper Series
2003-11, Federal Reserve Bank of San Francisco.
- Athanasios Orphanides & John C. Williams, 2005. "Inflation scares and forecast-based monetary policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 498-527, April.
- Orphanides, Athanasios & Williams, John C, 2005. "Inflation Scares and Forecast-Based Monetary Policy," CEPR Discussion Papers 4844, C.E.P.R. Discussion Papers.
- 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.).
- Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," FRB Atlanta Working Paper 2003-21, Federal Reserve Bank of Atlanta.
- James M. Nason & Gregor W. Smith, 2005.
"Identifying the New Keynesian Phillips curve,"
FRB Atlanta Working Paper
2005-01, Federal Reserve Bank of Atlanta.
- Tim W. Cogley & Argia M. Sbordone, 2005.
"A Search for a Structural Phillips Curve,"
510, University of California, Davis, Department of Economics.
- Timothy Cogley & Argia M. Sbordone, 2005. "A search for a structural Phillips curve," Staff Reports 203, Federal Reserve Bank of New York.
- Argia M. Sbordone & Timothy Cogley, 2004. "A Search for a Structural Phillips Curve," Computing in Economics and Finance 2004 291, Society for Computational Economics.
- Raf Wouters & Sergey Slobodyan, 2007. "Learning dynamics in an estimated medium-sized DSGE model," 2007 Meeting Papers 689, Society for Economic Dynamics.
- Peter N. Ireland, 2004.
"Technology Shocks in the New Keynesian Model,"
The Review of Economics and Statistics,
MIT Press, vol. 86(4), pages 923-936, November.
- Peter N. Ireland, 2002. "Technology Shocks in the New Keynesian Model," Boston College Working Papers in Economics 536, Boston College Department of Economics.
- Peter N. Ireland, 2004. "Technology Shocks in the New Keynesian Model," NBER Working Papers 10309, National Bureau of Economic Research, Inc.
- Bruce Preston, 2003.
"Learning about monetary policy rules when long-horizon expectations matter,"
FRB Atlanta Working Paper
2003-18, Federal Reserve Bank of Atlanta.
- 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.
- Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany.
- Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-22, December.
- 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.
- 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.
- Marc Giannoni & Michael Woodford, 2004.
"Optimal Inflation-Targeting Rules,"
in: The Inflation-Targeting Debate, pages 93-172
National Bureau of Economic Research, Inc.
- McCallum, Bennett T., 1999.
"Issues in the design of monetary policy rules,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
- Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
When requesting a correction, please mention this item's handle: RePEc:inu:caeprp:2008-017. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Center for Applied Economics and Policy Research)
If references are entirely missing, you can add them using this form.