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Adaptive Learning in Practice

  • Chryssi Giannitsarou
  • Eva Carceles-Poveda

While there is an extensive literature on identifying the asymptotic properties of adaptive learning algorithms, little is explicitly mentioned on how to actually implement these algorithms on the computer to analyze the quantitative effects of learning in dynamic macroeconomic models. The aim of this paper is twofold. First, we provide a detailed practical description of how to numerically implement least squares learning in the context of a reduced form forward looking model with an endogenous lag. Second, while we give a brief overview of the asymptotic properties of least squares learning for the reduced form at hand, the analysis focuses on illustrating the importance of the initial conditions of the learning algorithm for the study of medium and short run dynamics. In particular, we propose and discuss two ways of initializing the algorithm, one that is based on randomly generated data and a second that is ad-hoc. Using several variations of the basic real business cycle model, we then compare the behavior of the variables of interest for a variety of initializations. Our results indicate that, for short time horizons of up to 300 periods (corresponding to 75 years of quarterly data), the evolution of aggregate variables depends crucially on the initial conditions of the algorithm, and the learning dynamics might deviate significantly from the corresponding rational expectations case depending on the initialization.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 271.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:271
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  1. 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.).
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  4. Eva Carceles Poveda & Chryssi Giannitsarou, 2006. "Asset pricing with adaptive learning," Computing in Economics and Finance 2006 25, Society for Computational Economics.
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  13. In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002. "Escaping Nash Inflation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 1-40.
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  17. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
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  19. Thomas J. Sargent & Noah Williams & Tao Zha, 2006. "The conquest of South American inflation," FRB Atlanta Working Paper 2006-20, Federal Reserve Bank of Atlanta.
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