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Disciplining expectations: adding survey expectations in learning models

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  • Arturo Ormeno

    (Universitat Pompeu Fabra)

Abstract

Learning estimation of DSGE models is becoming a popular alternative to traditional rational expectation estimation. One of the most cited advantages of the introduction of a learning mechanism in DSGE models is that it generates the observed persistence in economic variables such as inflation and output. The evolution of the expectations obtained by learning is, however, not necessarily compatible with direct measurements of expectations such as the ones reported by surveys. I estimate a DSGE model where the expectations generated by the learning mechanism are restricted to be consistent with the dynamic of the surveys expectations. The results show that the standard learning procedure usually overestimates the persistence of the estimated model. The intuition behind these results is that the parameters and expectations estimates used in the learning procedures are designed to match as closely as possible the dynamic of current and past values of the macroeconomic variables included in the model. Therefore, including the dynamic of the surveys expectations in the objective function implies a restriction in the built-in model expectations and hence, less degree of freedoms to match the persistence observed in the actual data.

Suggested Citation

  • Arturo Ormeno, 2009. "Disciplining expectations: adding survey expectations in learning models," 2009 Meeting Papers 1140, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:1140
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    References listed on IDEAS

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    1. Slobodyan, Sergey & Wouters, Raf, 2012. "Learning in an estimated medium-scale DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 26-46.
    2. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1406-1435, July.
    3. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
    4. Milani, Fabio, 2008. "Learning, monetary policy rules, and macroeconomic stability," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3148-3165, October.
    5. Milani, Fabio, 2007. "Expectations, learning and macroeconomic persistence," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 2065-2082, October.
    6. Rabanal, Pau & Rubio-Ramirez, Juan F., 2005. "Comparing New Keynesian models of the business cycle: A Bayesian approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1151-1166, September.
    7. Raf Wouters & Sergey Slobodyan, 2009. "Estimating a medium–scale DSGE model with expectations based on small forecasting models," 2009 Meeting Papers 654, Society for Economic Dynamics.
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