Browsing by Author "Honkapohja, Seppo, 1951-"
Now showing 1 - 20 of 20
Results Per Page
Sort Options
Item Open Access Adaptive Learning and Monetary Policy Design(University of Oregon, Dept. of Economics, 2002-11-08) Evans, George W., 1949-; Honkapohja, Seppo, 1951-We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under private agent learning. Appropriately designed expectations based rules can yield optimal rational expectations equilibria that are both determinate and stable under learning. Some simple instrument rules and approximate targeting rules also have these desirable properties. We take up various complications in implementing optimal policy, including the observability of key variables and the required knowledge of structural parameters. An additional issue that we take up concerns the implications of expectation shocks not arising from transitional learning effects.Item Open Access Anticipated Fiscal Policy and Adaptive Learning(University of Oregon, Dept of Economics, 2007-02-18) Evans, George W., 1949-; Honkapohja, Seppo, 1951-; Mitra, KaushikWe consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks.Item Open Access Are Stationary Hyperinflation Paths Learnable?(University of Oregon, Dept of Economics, 2003-03-17) Adam, Klaus; Evans, George W., 1949-; Honkapohja, Seppo, 1951-Earlier studies of the seigniorage inflation model have found that the high-inflation steady state is not stable under adaptive learning. We reconsider this issue and analyze the full set of solutions for the linearized model. Our main focus is on stationary hyperinflationary paths near the high-inflation steady state. The hyperinflationary paths are stable under learning if agents can utilize contemporaneous data. However, in an economy populated by a mixture of agents, some of whom only have access to lagged data, stable inflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high.Item Open Access Does Ricardian Equivalence Hold When Expectations are not Rational?(University of Oregon, Dept of Economics, 2010-08-04) Evans, George W., 1949-; Honkapohja, Seppo, 1951-; Mitra, Kaushik, 1969-This paper considers the Ricardian Equivalence proposition when expectations are not rational and are instead formed using adaptive learning rules. We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satisfied. However, new cases of failure can also emerge under learning. In particular, for Ricardian Equivalence to obtain, agents’ expectations must not depend on government’s financial variables under deficit financing.Item Open Access The E-Correspondence Principle(University of Oregon, Dept of Economics, 2003-06-23) Evans, George W., 1949-; Honkapohja, Seppo, 1951-We introduce the E-correspondence principle for stochastic dynamic expectations models as a tool for comparative dynamics analysis. The principle is applicable to equilibria that are stable under least squares and closely related learning rules. With this technique it is possible to study, without explicit solving for the equilibrium, how properties of the equilibrium are affected by changes in the structural parameters of the model. Even if qualitative comparative dynamics results are not obtainable, a quantitative version of the principle can be applied.Item Open Access Existence of Adaptively Stable Sunspot Equilibria near an Indeterminate Steady State(University of Oregon, Dept. of Economics, 2002-04-06) Evans, George W., 1949-; Honkapohja, Seppo, 1951-We examine the nonlinear model x_t = E_t F(x_(t+1)). Markov SSEs exist near an indeterminate steady state, hat(x)=F(hat(x)), provided |F'(hat(x)| > 1. Despite the importance of indeterminancy in macroeconomics, earlier results have not provided conditions for the existance of adaptively stable SSEs near an indeterminate steady state. We show that there exists Markov SSEs near hat(x) that are E-stable, and therefore locally stable under adaptive learning, if F'(hat(x)) < -1.Item Open Access Expectational Stability of Stationary Sunspot Equilibria in a Forward-looking Linear Model(University of Oregon, Dept. of Economics, 2002-01-14) Evans, George W., 1949-; Honkapohja, Seppo, 1951-We consider the stability under adaptive learning of the complete set of solutions to the model x_i=beta(Ei*)(x_i+1) when |beat| >1. In addition to the fundamentals solution, the literature describes both finite-state Markov sunspot solutions and autoregressive solutions depending on an arbitrary martingale difference sequence. We clarify the relationships between these solutions and show that the stability properties of equilibria may depend crucially on the representations used by agents in the learning process. Autoregressive forms of solutions are not learnable, but finite-state Markov sunspot solutions are stable under learning if beta < -1.Item Open Access Expectations and the Stability Problem for Optimal Monetary Policies(University of Oregon, Dept. of Economics, 2001-08-03) Evans, George W., 1949-; Honkapohja, Seppo, 1951-A fundamentals based monetary policy rule, which would be the optimal monetary policy without commitment when private agents have perfectly rational expectations, is unstable if in fact these agents follow standard adaptive learning rules. This problem can be overcome if private expectations are observed and suitable incorporated into the policy maker's optimal rule. These strong results extend to the case in which there is simultaneous learning by the policy maker and the private agents. Our findings show the importance of conditioning policy appropriately, not just on fundamentals, but also directly on observed household and firm expectations.Item Open Access Expectations, Deflation Traps and Macroeconomic Policy(University of Oregon, Dept of Economics, 2009-07-06) Evans, George W., 1949-; Honkapohja, Seppo, 1951-We examine global economic dynamics under infinite-horizon learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), we find that under normal monetary and fiscal policy the intended steady state is locally but not globally stable. Unstable deflationary paths can arise after large pessimistic shocks to expectations. For large expectation shocks pushing interest rates to the zero lower bound, temporary increases in government spending can be used to insulate the economy from deflation traps.Item Open Access Friedman's Money Supply Rule versus Optimal Interest Rate Policy(University of Oregon, Dept of Economics, 2003-07-12) Evans, George W., 1949-; Honkapohja, Seppo, 1951-Using New Keynesian models, we compare Friedman's k-percent money supply rule to optimal interest rate setting, with respect to determinacy, stability under learning and optimality. First we review the recent literature: open-loop interest rate rules are subject to indeterminacy and instability problems, but a properly chosen expectations-based rule yields determinacy and stability under learning, and implements optimal policy. We show that Friedman's rule also can generate equilibria that are determinate and stable under learning. However, computing the mean quadratic welfare loss, we find for calibrated models that Friedman's rule performs poorly when compared to the optimal interest rate rule.Item Open Access Generalized Stochastic Gradient Learning(University of Oregon, Dept of Economics, 2005-09-19) Evans, George W., 1949-; Honkapohja, Seppo, 1951-We study the properties of generalized stochastic gradient (GSG) learning in forwardlooking models. We examine how the conditions for stability of standard stochastic gradient (SG) learning both differ from and are related to E-stability, which governs stability under least squares learning. SG algorithms are sensitive to units of measurement and we show that there is a transformation of variables for which E-stability governs SG stability. GSG algorithms with constant gain have a deeper justification in terms of parameter drift, robustness and risk sensitivity.Item Open Access An Interview with Thomas J. Sargent(University of Oregon, Dept of Economics, 2005-01-11) Evans, George W., 1949-; Honkapohja, Seppo, 1951-This is the text of an interview with Thomas J. Sargent. The interview will be published in Macroeconomic Dynamics.Item Open Access Learning and Macroeconomics(University of Oregon, Dept of Economics, 2008-07-11) Honkapohja, Seppo, 1951-; Evans, George W., 1949-Expectations play a central role in modern macroeconomic theories. The econometric learning approach models economic agents as forming expectations by estimating and updating forecasting models in real time. The learning approach provides a stability test for rational expectations and a selection criterion in models with multiple equilibria. In addition, learning provides new dynamics if older data is discounted, models are misspecified or agents choose between competing models. This paper describes the E-stability principle and the stochastic approximation tools used to assess equilibria under learning. Applications of learning to a number of areas are reviewed, including the design of monetary and fiscal policy, business cycles, self-fulfilling prophecies, hyperinflation, liquidity traps, and asset prices.Item Open Access Liquidity Traps, Learning and Stagnation(University of Oregon, Dept of Economics, 2007-06-05) Evans, George W., 1949-; Guse, Eran A. (Eran Alan), 1975-; Honkapohja, Seppo, 1951-We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend augmenting normal policies with aggressive monetary and fiscal policy that guarantee a lower bound on inflation. In contrast, policies geared toward ensuring an output lower bound are insufficient for avoiding deflationary spirals.Item Open Access Monetary Policy, Expectations and Commitment(University of Oregon, Dept of Economics, 2005-04-06) Evans, George W., 1949-; Honkapohja, Seppo, 1951-This is a revised and shortened version of Working Paper 2002-11. Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approximate commitment policy. We assess these rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs particularly well on both counts.Item Open Access Monetary policy, expectations and commitment(University of Oregon, Dept. of Economics, 2002-05-22) Evans, George W., 1949-; Honkapohja, Seppo, 1951-Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approxmiate commitment policy. We assess these optimal reaction functions and instrument rules in terms of whether they lead to an RE equilibrium that is both locally determinate and stable under adaptive learning by private agents. A reaction function that appropriately depends explicitly on private expectations performs well on both counts.Item Open Access Near-Rational Exuberance(University of Oregon, Dept of Economics, 2005-09-17) Bullard, James; Evans, George W., 1949-; Honkapohja, Seppo, 1951-We study how the use of judgement or "add-factors" in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic environments. Examples include a simple asset pricing model and the New Keynesian monetary policy framework. Inclusion of judgement in forecasts can lead to self-fulfilling fluctuations, but without the requirement that the underlying rational expectations equilibrium is locally indeterminate. We suggest ways in which policymakers might avoid unintended outcomes by adjusting policy to minimize the risk of exuberance equilibria.Item Open Access Policy Interaction, Expectations and the Liquidity Trap(University of Oregon, Dept. of Economics, 2003-04-30) Evans, George W., 1949-; Honkapohja, Seppo, 1951-We consider inflation and government debt dynamics when monetary policy employs a global interest rate rule and private agents forecast using adaptive learning. Because of the zero lower bound on interest rates, active interest rate rules are known to imply the existence of a second, low inflation steady state, below the target inflation rate. Under adaptive learning dynamics we find the additional possibility of a liquidity trap, in which the economy slips below this low inflation steady state and is driven to an even lower inflation floor that is supported by a switch to an aggressive money supply rule. Fiscal policy alone cannot push the economy out of the liquidity trap. However, raising the threshold at which the money supply rule is employed can dislodge the economy from the liquidity trap and ensure a return to the target equilibrium.Item Open Access Policy Interaction, Learning and the Fiscal Theory of Prices(University of Oregon, Dept. of Economics, 2002-08-03) Evans, George W., 1949-; Honkapohja, Seppo, 1951-We investigate both the rational explosive inflation paths studied by (McCallum 2001), and the classification of fiscal and monetary polices proposed by (Leeper 1991), for stability under learning of the rational expectations equilibria (REE). Our first result is that the fiscalist REE in the model of (McCallum 2001) is not locally stable under learning. In contrast, in the setting of (Leeper 1991), different possibilities can arise. We find, in particular, that there are parameter domains for which the fiscal theory solution, in which fiscal variables affect the price level, can be a stable outcome under learning. However, for other parameter domains the monetarist solution is instead the stable equilibrium.Item Open Access Stable Sunspot Equilibira in a Cash-in-Advance Economy(University of Oregon, Dept. of Economics, 2002-10-25) Evans, George W., 1949-; Honkapohja, Seppo, 1951-; Marimon, Ramon, 1953-We develop a monetary model with flexible supply of labor, cash in advance constraints and government spending financed by seignorage. This model has two regimes. One regime is conventional with two steady states. The other regime has a unique steady state which can be determinate or indeterminate. In the latter case there exist sunspot equilibria which are stable under adaptive learning, taking the form of noisy finite state Markov processes at resonant frequencies. For a range of parameter values, a sufficient reduction in government purchases will eliminate these equilibria.