Finite Horizon Learning
Incorporating adaptive learning into macroeconomics requires assumptions about how agents incorporate their forecasts into their decision-making. We develop a theory of bounded rationality that we call finite-horizon learning. This approach generalizes the two existing benchmarks in the literature: Euler-equation learning, which assumes that consumption decisions are made to satisfy the one-step-ahead perceived Euler equation, and infinite-horizon learning, in which consumption today is determined optimally from an infinite-horizon optimization problem with given beliefs. In our approach, agents hold a finite forecasting/planning horizon. We find for the Ramsey model that the unique rational expectations equilibrium is E-stable at all horizons. However, transitional dynamics can differ significantly depending upon the horizon.
|Date of creation:||25 Jan 2012|
|Date of revision:|
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- Preston, Bruce, 2005.
"Learning about Monetary Policy Rules when Long-Horizon Expectations Matter,"
830, University Library of Munich, Germany.
- 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.
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MIT Press Books,
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- James B. Bullard & Kaushik Mitra, 2002.
"Learning about monetary policy rules,"
2000-001, Federal Reserve Bank of St. Louis.
- George W. Evans & Seppo Honkapohja & Kaushik Mitra, 2007.
"Anticipated Fiscal Policy and Adaptive Learning,"
CDMA Working Paper Series
200717, Centre for Dynamic Macroeconomic Analysis.
- Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2007. "Anticipated Fiscal Policy and Adaptive Learning," CEPR Discussion Papers 6216, C.E.P.R. Discussion Papers.
- George W. Evans & Seppo Honkapohja & Kaushik Mitra, 2007. "Anticipated Fiscal Policy and Adaptive Learning," University of Oregon Economics Department Working Papers 2007-5, University of Oregon Economics Department, revised 13 Dec 2008.
- Evans, G.W. & Honkapohja ,S. & Mitra, K., 2007. "Anticipated Fiscal Policy and Adaptive Learning," Cambridge Working Papers in Economics 0705, Faculty of Economics, University of Cambridge.
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