Expectations, Learning and Macroeconomic Persistence

Fabio Milani

No 50608, Working Papers from University of California-Irvine, Department of Economics

Abstract: This paper presents an estimated model with learning and provides evidence that learning can improve the fit of popular monetary DSGE models and endogenously generate realistic levels of persistence. The paper starts with an agnostic view, developing a model that nests learning and some of the structural sources of persistence, such as habit formation in consumption and inflation indexation, that are typically needed in monetary models with rational expectations to match the persistence of macroeconomic variables. I estimate the model by likelihood-based Bayesian methods, which allow the estimation of the learning gain coefficient jointly with the "deep" parameters of the economy. The empirical results show that when learning replaces rational expectations, the estimated degrees of habits and indexation drop near zero. This ?nding suggests that persistence arises in the model economy mainly from expectations and learning. The posterior model probabilities show that the specification with learning fits significantly better than does the specification with rational expectations. Finally, if learning rather than mechanical sources of persistence provides a more appropriate representation of the economy, the implied optimal policy will be different. The policymaker will also incur substantial costs from misspecifying private expectations formation.

Keywords: Persistence, Constant-gain learning, Expectations, Habit formation in consumption, Inflation inertia; Phillips curve; Bayesian econometrics; New-Keynesian model. (search for similar items in EconPapers)
JEL-codes: C11 D84 E30 E50 E52 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2005-08
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Expectations, learning and macroeconomic persistence (2007)
Working Paper: Expectations, Learning and Macroeconomic Persistence (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:irv:wpaper:050608

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