Department of Economics
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Browsing Department of Economics by Author "Branch, William A."
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Item Open Access Adaptive Learning, Endogenous Inattention, and Changes in Monetary Policy(University of Oregon, Dept of Economics, 2006-06-22) Branch, William A.; Evans, George W., 1949-; Carlson, John; McGough, BruceThis paper develops an adaptive learning formulation of an extension to the Ball, Mankiw and Reis (2005) sticky information model that incorporates endogenous inattention. We show that, following an exogenous increase in the policymaker’s preferences for price vs. output stability, the learning process can converge to a new equilibrium in which both output and price volatility are lower.Item Open Access Asset Return Dynamics and Learning(University of Oregon, Dept of Economics, 2006-11-13) Branch, William A.; Evans, George W., 1949-This paper advocates a theory of expectation formation that incorporates many of the central motivations of behavioral finance theory while retaining much of the discipline of the rational expectations approach. We provide a framework in which agents, in an asset pricing model, underparameterize their forecasting model in a spirit similar to Hong, Stein, and Yu (2005) and Barberis, Shleifer, and Vishny (1998), except that the parameters of the forecasting model, and the choice of predictor, are determined jointly in equilibrium. We show that multiple equilibria can exist even if agents choose only models that maximize (risk-adjusted) expected profits. A real-time learning formulation yields endogenous switching between equilibria. We demonstrate that a realtime learning version of the model, calibrated to U.S. stock data, is capable of reproducing many of the salient empirical regularities in excess return dynamics such as under/overreaction, persistence, and volatility clustering.Item Open Access Intrinsic Heterogeneity in Expectation Formation(University of Oregon, Dept. of Economics, 2003-05-16) Branch, William A.; Evans, George W., 1949-We introduce the concept of a Misspecification Equilibrium to dynamic macroeconomics. Agents choose between a list of misspecified econometric models and base their selection on relative forecast performance. A Misspecification Equilibrium is an equilibrium stochastic process in which agents forecast optimally given their choices, with the forecasting model parameters and predictor proportions endogenously determined. For appropriate conditions on the exogenous driving process and the degree of feedback of expectations, the Misspecification Equilibrium will exhibit Intrinsic Heterogeneity. With Intrinsic Heterogeneity more than one misspecified model receives positive weight in the distribution of predictors across agents, even in the neoclassical limit in which only the most successful predictors are used.Item Open Access Learning about Risk and Return: A Simple Model of Bubbles and Crashes(University of Oregon, Dept of Economics, 2008-01-31) Branch, William A.; Evans, George W., 1949-This paper demonstrates that an asset pricing model with least-squares learning can lead to bubbles and crashes as endogenous responses to the fundamentals driving asset prices. When agents are risk-averse they generate forecasts of the conditional variance of a stock’s return. Recursive updating of the conditional variance and expected return implies two mechanisms through which learning impacts stock prices: occasional shocks may lead agents to lower their risk estimate and increase their expected return, thereby triggering a bubble; along a bubble path recursive estimates of risk will increase and crash the bubble.Item Open Access Model Uncertainty and Endogenous Volatility(University of Oregon, Dept of Economics, 2005-10-18) Branch, William A.; Evans, George W., 1949-This paper identifies two channels through which the economy can generate endogenous inflation and output volatility, an empirical regularity, by introducing model uncertainty into a Lucas-type monetary model. The equilibrium path of inflation depends on agents' expectations and a vector of exogenous random variables. Following Branch and Evans (2004) agents are assumed to underparameterize their forecasting models. A Misspecification Equilibrium arises when beliefs are optimal given the misspecification and predictor proportions based on relative forecast performance. We show that there may exist multiple Misspecification Equilibria, a subset of which are stable under least squares learning and dynamic predictor selection. The dual channels of least squares parameter updating and dynamic predictor selection combine to generate regime switching and endogenous volatility.Item Open Access Monetary Policy and Heterogeneous Expectations(University of Oregon, Dept of Economics, 2010-04-30) Branch, William A.; Evans, George W., 1949-This paper studies the implications for monetary policy of heterogeneous expectations in a New Keynesian model. The assumption of rational expec- tations is replaced with parsimonious forecasting models where agents select between predictors that are underparameterized. In a Misspecification Equilibrium agents only select the best-performing statistical models. We demonstrate that, even when monetary policy rules satisfy the Taylor principle by adjusting nominal interest rates more than one for one with inflation, there may exist equilibria with Intrinsic Heterogeneity. Under certain conditions, there may exist multiple misspecification equilibria. We show that these findings have important implications for business cycle dynamics and for the design of monetary policy.Item Open Access Monetary Policy, Endogenous Inattention, and the Volatility Trade-off(University of Oregon, Dept of Economics, 2004-12-07) Branch, William A.; Carlson, John; Evans, George W., 1949-; McGough, BruceThis paper addresses the output-price volatility puzzle by studying the interaction of optimal monetary policy and agents' beliefs. We assume that agents choose their information acquisition rate by minimizing a loss function that depends on expected forecast errors and information costs. Endogenous inattention is a Nash equilibrium in the information processing rate. Although a decline of policy activism directly increases output volatility, it indirectly anchors expectations, which decreases output volatility. If the indirect effect dominates then the usual trade-off between output and price volatility breaks down. This provides a potential explanation for the "Great Moderation" that began in the 1980's.Item Open Access A Simple Recursive Forecasting Model(University of Oregon, Dept of Economics, 2005-02-01) Branch, William A.; Evans, George W., 1949-We compare the performance of alternative recursive forecasting models. A simple constant gain algorithm, used widely in the learning literature, both forecasts well out of sample and also provides the best fit to the Survey of Professional Forecasters.