Adaptive Learning with a Unit Root: An Application to the Current Account

Datum

2006-07-31

Zeitschriftentitel

ISSN der Zeitschrift

Bandtitel

Verlag

University of Oregon, Dept of Economics

Zusammenfassung

This paper develops a simple two-country, two-good model of international trade and borrowing that suppresses all previous sources of current account dynamics. Under rational expectations, international debt follows a random walk. Under adaptive learning however, international debt behaves like either a stationary or an explosive process. Whether debt converges or diverges depends on the model’s exact specification and the specific learning algorithm that agents employ. When debt diverges, a financial crisis eventually occurs to ensure that the model’s transversality condition holds. Such a financial crisis causes an abrupt decrease in the debtor country’s consumption and utility.

Beschreibung

39 p.

Schlagwörter

Current account, International debt movements, Expectations, Adaptive learning

Zitierform