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Adaptive Learning and Macroeconomic Inertia in the Euro Area*

Fabio Milani ()

Journal of Common Market Studies, 2009, vol. 47, issue 3, 579-599

Abstract: This article aims to study the determinants of macroeconomic inertia in the euro area. To this end, it estimates a simple monetary DSGE model with private‐sector learning, but which also includes more structural sources of inertia, such as habit formation in consumption and inflation indexation. Economic agents are assumed to form near‐rational expectations and to learn the model parameters over time. Likelihood‐based Bayesian methods are used to estimate the agents' beliefs jointly within the system and to provide evidence on the fit of alternative learning rules. The results show that European macroeconomic inertia has only moderately changed over the sample. The evidence is consistent with a small gain coefficient and low degrees of habits and indexation, although some uncertainty remains after the estimation.

Date: 2009
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Handle: RePEc:bla:jcmkts:v:47:y:2009:i:3:p:579-599