Learning and Macroeconomics

George W Evans, Seppo Honkapohja

    Research output: Contribution to journalArticlepeer-review

    10 Citations (Scopus)

    Abstract

    Expectations play a central role in modern macroeconomic theories. The econometric learning approach models economic agents as forming expectations by estimating and updating forecasting models in real time. The learning approach provides a stability test for rational expectations and a selection criterion in models with multiple equilibria. In addition, learning provides new dynamics if older data are discounted, if models are misspecified, or if agents choose between competing models. This paper describes the expectational stability (E-stability) principle and the stochastic approximation tools used to assess equilibria under learning. Applications of learning to a number of areas are reviewed, including the design of monetary and fiscal policy, business cycles, self-fulfilling prophecies, hyperinflation, liquidity traps, and asset prices.

    Original languageEnglish
    Pages (from-to)421-449
    Number of pages31
    JournalAnnual Review Of Economics
    Volume1
    DOIs
    Publication statusPublished - 2009

    Keywords

    • E-stability
    • stochastic approximation
    • persistent learning dynamics
    • business cycles
    • monetary policy
    • asset prices
    • REAL BUSINESS CYCLES
    • MONETARY-POLICY
    • SUNSPOT EQUILIBRIA
    • EXCESS VOLATILITY
    • HETEROGENEOUS EXPECTATIONS
    • RATIONAL-EXPECTATIONS
    • STABILIZATION POLICY
    • MODEL UNCERTAINTY
    • ANIMAL SPIRITS
    • STOCK-PRICES

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