Learning and Macroeconomics

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Title: Learning and Macroeconomics
Author: Honkapohja, Seppo, 1951-; Evans, George W., 1949-
Abstract: 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.
Description: 51 p.
URI: http://hdl.handle.net/1794/8264
Date: 2008-07-11

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