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Time-Varying Parameters and Endogenous Learning Algorithms

The adaptive learning has primarily focused on decreasing gain learning and constant gain learning. As pointed out theoretically by Marcet and Nicolini (2003) and empirically by Milani (2007) an endogenous learning mechanism may explain key economic behaviors, such as recurrent hyperinflation or time varying volatility. This paper evaluates the mechanism used in those papers in addition to proposing an alternative endogenous learning algorithm. The proposed algorithm outperforms the Marcet and Nicolini's algorithm in simulations and may result in exotic dynamics.

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File URL: http://webpages.ursinus.edu/egaus/Research/EndogenousGains.pdf
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Paper provided by Ursinus College, Department of Economics in its series Working Papers with number 13-02.

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Length: pages
Date of creation: 01 Mar 2013
Date of revision:
Handle: RePEc:urs:urswps:13-02
Contact details of provider: Postal: Ursinus College 601 East Main St. Collegeville, PA 19426
Web page: http://webpages.ursinus.edu/ecba/

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  1. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
  2. Fabio Milani, 2007. "Learning and Time-Varying Macroeconomic Volatility," Working Papers 070802, University of California-Irvine, Department of Economics.
  3. Evans, George W & Ramey, Garey, 2001. "Adaptive Expectations, Underparameterization and the Lucas Critique," University of California at San Diego, Economics Working Paper Series qt41f2h196, Department of Economics, UC San Diego.
  4. Eric Gaus, 2012. "Robust Stability of Monetary Policy Rules under Adaptive Learning," Working Papers 13-01, Ursinus College, Department of Economics, revised 14 Dec 2012.
  5. Duffy, John & Xiao, Wei, 2004. "The value of interest rate stabilization polices when agents are learning," Working Papers 2004-02, University of New Orleans, Department of Economics and Finance.
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