Learning the Ramsey outcome in a Kydland & Prescott economy

Jasmina Arifovic and Murat Yildizoglu

Cahiers du GREThA (2007-2019) from Groupe de Recherche en Economie Théorique et Appliquée (GREThA)

Abstract: We study learning in the Kydland and Prescott environment. Our policy maker evaluates its potential strategies regarding the announced and the actual inflation rate using its mental model. This model is forward looking and adaptive at the same time. \r\nThere are two types of agents: Believers who set their inflation forecast equal to the announced inflation, and nonbelievers who form static optimal forecast coupled with a forecast error correction mechanism. Our results show that the economy can reach near Ramsey outcomes most of the time. In the absence of believers, the economies almost always converge to the Ramsey outcome. \r\nIn their experiments with human subjects, Arifovic and Sargent (2003) showed that experimental economies reach and stay close to the Ramsey outcome most of the time, giving support to the \'just do it\' policy recommendation. In light of the experimental findings, our model is of particular interest as it is the only agent-based or adaptive learning model that consistently selects the Ramsey outcome.

Keywords: learning in the Kydland-Prescott environment; artificial neural networks; Ramsey outcome (search for similar items in EconPapers)
JEL-codes: C45 C72 D60 E50 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cmp, nep-mac and nep-mon
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Related works:
Journal Article: Learning the Ramsey outcome in a Kydland & Prescott economy (2019)
Working Paper: Learning the Ramsey Outcome in a Kydland & Prescott Economy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:grt:wpegrt:2014-06

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