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Learning and Expectations in Macroeconomics : Frontiers of Economic Research - George W. Evans

Learning and Expectations in Macroeconomics

Frontiers of Economic Research

Hardcover Published: 28th January 2001
ISBN: 9780691049212
Number Of Pages: 424

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A crucial challenge for economists is figuring out how people interpret the world and form expectations that will likely influence their economic activity. Inflation, asset prices, exchange rates, investment, and consumption are just some of the economic variables that are largely explained by expectations. Here George Evans and Seppo Honkapohja bring new explanatory power to a variety of expectation formation models by focusing on the learning factor. Whereas the rational expectations paradigm offers the prevailing method to determining expectations, it assumes very theoretical knowledge on the part of economic actors. Evans and Honkapohja contribute to a growing body of research positing that households and firms learn by making forecasts using observed data, updating their forecast rules over time in response to errors. This book is the first systematic development of the new statistical learning approach.

Depending on the particular economic structure, the economy may converge to a standard rational-expectations or a "rational bubble" solution, or exhibit persistent learning dynamics. The learning approach also provides tools to assess the importance of new models with expectational indeterminacy, in which expectations are an independent cause of macroeconomic fluctuations. Moreover, learning dynamics provide a theory for the evolution of expectations and selection between alternative equilibria, with implications for business cycles, asset price volatility, and policy. This book provides an authoritative treatment of this emerging field, developing the analytical techniques in detail and using them to synthesize and extend existing research.

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"An excellent, wide ranging and detailed survey of what is known about the stability under learning of a wide variety of models... [A]n essential reference for researchers."--Margaret Bray, Journal of Economics

Prefacep. xv
View of the Landscape
Expectations and the Learning Approachp. 5
Expectations in Macroeconomicsp. 5
Two Examplesp. 8
Classical Models of Expectation Formationp. 9
Learning: The New View of Expectationsp. 12
Statistical Approach to Learningp. 15
A General Frameworkp. 16
Overview of the Book 19
Introduction to the Techniquesp. 25
Introductionp. 25
The Cobweb Modelp. 26
Econometric Learningp. 27
Expectational Stabilityp. 30
Rational vs. Reasonable Learningp. 32
Recursive Least Squaresp. 32
Convergence of Stochastic Recursive Algorithmsp. 34
Application to the Cobweb Modelp. 37
The E-Stability Principlep. 39
Discussion of the Literature 43
Variations on a Themep. 45
Introductionp. 45
Heterogeneous Expectationsp. 45
Learning with Constant Gainp. 48
Learning in Nonstochastic Modelsp. 50
Stochastic Gradient Learningp. 55
Learning with Misspecification 56
Applicationsp. 59
Introductionp. 59
The Overlapping Generations Modelp. 60
A Linear Stochastic Macroeconomic Modelp. 63
The Ramsey Modelp. 68
The Diamond Growth Modelp. 71
A Model with Increasing Social Returnsp. 72
Other Modelsp. 81
Appendix 82
Mathematical Background and Tools
The Mathematical Backgroundp. 87
Introductionp. 87
Difference Equationsp. 88
Differential Equationsp. 93
Linear Stochastic Processesp. 99
Markov Processesp. 108
Ito Processesp. 110
Appendix on Matrix Algebrap. 115
References for Mathematical Background 118
Tools: Stochastic Approximationp. 121
Introductionp. 121
Stochastic Recursive Algorithmsp. 123
Convergence: The Basic Resultsp. 128
Convergence: Further Discussionp. 134
Instability Resultsp. 138
Expectational Stabilityp. 140
Global Convergence 144
Further Topics in Stochastic Approximationp. 147
Introductionp. 147
Algorithms for Nonstochastic Frameworksp. 148
The Case of Markovian State Dynamicsp. 154
Convergence Results for Constant-Gain Algorithmsp. 162
Gaussian Approximation for Cases of Decreasing Gainp. 166
Global Convergence on Compact Domainsp. 167
Guide to the Technical Literature 169
Learning in Linear Models
Univariate Linear Modelsp. 173
Introductionp. 173
A Special Casep. 174
E-Stability and Least Squares Learning: MSV Solutionsp. 179
E-Stability and Learning: The Full Class of Solutionsp. 183
Extension 1: Lagged Endogenous Variablesp. 193
Extension 2: Models with Time-t Datingp. 198
Conclusions 204
Further Topics in Linear Modelsp. 205
Introductionp. 205
Muth's Inventory Modelp. 205
Overparameterization in the Special Casep. 206
Extended Special Casep. 211
Linear Model with Two Forward Leadsp. 215
Learning Explosive Solutionsp. 219
Bubbles in Asset Pricesp. 220
Heterogeneous Learning Rules 223
Multivariate Linear Modelsp. 227
Introductionp. 227
MSV Solutions and Learningp. 229
Models with Contemporaneous Expectationsp. 236
Real Business Cycle Modelp. 239
Irregular REEp. 243
Conclusionsp. 249
Appendix 1: Linearizationsp. 249
Appendix 2: Solution Techniques 252
Learning in Nonlinear Models Nonlinear Models: Steady Statesp. 267
Introductionp. 267
Equilibria under Perfect Foresightp. 269
Noisy Steady Statesp. 269
Adaptive Learning for Steady Statesp. 273
E-Stability and Learningp. 273
Applications 276
Cycles and Sunspot Equilibriap. 287
Introductionp. 287
Overview of Resultsp. 288
Deterministic Cyclesp. 291
Noisy Cyclesp. 293
Existence of Sunspot Equilibriap. 300
Learning SSEsp. 304
Global Analysis of Learning Dynamicsp. 310
Conclusions 313
Further Topics 1
Table of Contents provided by Publisher. All Rights Reserved.

ISBN: 9780691049212
ISBN-10: 0691049211
Series: Frontiers of Economic Research
Audience: Tertiary; University or College
Format: Hardcover
Language: English
Number Of Pages: 424
Published: 28th January 2001
Country of Publication: US
Dimensions (cm): 24.13 x 16.46  x 3.4
Weight (kg): 0.78