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Learning, Adaptive Expectations, and Technology Shocks

  • Kevin X.D. Huang


    (Department of Economics, Vanderbilt University)

  • Zheng Liu


    (Department of Economics, Emory University)

  • Tao Zha

    (Federal Reserve Bank of Atlanta)

This study explores theoretical and macroeconomic implications of the self-confirming equilibrium in a standard growth model. When rational expectations are replaced by adaptive expectations, we prove that the self-confirming equilibrium is the same as the steady state rational expectations equilibrium, but that dynamics around the steady state are substantially different between the two equilibria. We show that, in contrast to Williams03, the differences are driven mainly by the lack of the wealth effect and the strengthening of the intertemporal substitution effect, not by escapes. As a result, adaptive expectations substantially alter the amplification and propagation mechanisms and allow technology shocks to exert much more impact on macroeconomic variables than do rational expectations.

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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0807.

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Date of creation: Aug 2008
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Handle: RePEc:van:wpaper:0807
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