Learning in a Medium-Scale DSGE Model with Expectations Based on Small Forecasting Models

Sergey Slobodyan and Raf Wouters

American Economic Journal: Macroeconomics, 2012, vol. 4, issue 2, 65-101

Abstract: This paper evaluates the empirical performance of a medium-scale DSGE model with agents forming expectations using small forecasting models updated by the Kalman filter. The adaptive learning model fits the data better than the rational expectations (RE) model. Beliefs about the inflation persistence explain the observed decline in the mean and the volatility of inflation as well as Phillips curve flattening. Learning about inflation results in lower estimates for the persistence of the exogenous shocks that drive price and wage dynamics in the RE version of the model. Expectations based on small forecasting models are closely related to the survey evidence on inflation expectations. (JEL C53, D83, D84, E13, E17, E31)

JEL-codes: C53 D83 D84 E13 E17 E31 (search for similar items in EconPapers)
Date: 2012
Note: DOI: 10.1257/mac.4.2.65
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Citations: View citations in EconPapers (97)

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