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Learning, Adaptive Expectations, and Technology Shocks

Kevin Huang (), Zheng Liu and Tao Zha

No 807, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: This study explores theoretical and macroeconomic implications of the self-confirming equilibrium in a standard growth model. When rational expectations are replaced by adaptive expectations, we prove that the self-confirming equilibrium is the same as the steady state rational expectations equilibrium, but that dynamics around the steady state are substantially different between the two equilibria. We show that, in contrast to Williams03, the differences are driven mainly by the lack of the wealth effect and the strengthening of the intertemporal substitution effect, not by escapes. As a result, adaptive expectations substantially alter the amplification and propagation mechanisms and allow technology shocks to exert much more impact on macroeconomic variables than do rational expectations.

Keywords: Self confirming equilibrium; amplification; labor market dynamics; wealth and substitution effects; hump-shaped responses (search for similar items in EconPapers)
JEL-codes: E32 E37 (search for similar items in EconPapers)
Date: 2008-08
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 (1)

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http://www.accessecon.com/pubs/VUECON/vu08-w07.pdf First version, 2008 (application/pdf)

Related works:
Journal Article: Learning, Adaptive Expectations and Technology Shocks (2009)
Journal Article: Learning, Adaptive Expectations and Technology Shocks (2009) Downloads
Working Paper: Learning, adaptive expectations, and technology shocks (2008) Downloads
Working Paper: Learning, adaptive expectations, and technology shocks (2008) Downloads
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