Adaptive Learning with a Unit Root: An Application to the Current Account
Ronald Davies () and
Paul Shea ()
University of Oregon Economics Department Working Papers from University of Oregon Economics Department
This paper develops a simple two-country, two-good model of international trade and borrowing that suppresses all previous sources of current account dynamics. Under rational expectations, international debt follows a random walk. Under adaptive learning however, international debt behaves like either a stationary or an explosive process. Whether debt converges or diverges depends on the specific learning algorithm that agents employ. When debt diverges, a financial crisis eventually occurs to ensure that the modelÂ’s transversality condition holds. Such a financial crisis causes an abrupt decrease in the debtor countryÂ’s consumption and utility.
Keywords: current account; international debt movements; expectations; adaptive learning. (search for similar items in EconPapers)
JEL-codes: D83 D84 F11 F32 F41 (search for similar items in EconPapers)
Date: 2003-04-10, Revised 2003-06-10
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://economics.uoregon.edu/papers/UO-2006-15_Davies_Unit.pdf [301 Moved Permanently]--> https://economics.uoregon.edu/papers/UO-2006-15_Davies_Unit.pdf)
Journal Article: Adaptive learning with a unit root: An application to the current account (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ore:uoecwp:2006-15
Access Statistics for this paper
More papers in University of Oregon Economics Department Working Papers from University of Oregon Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Bill Harbaugh ().