Learning, Adaptive Expectations, and Technology Shocks

FRB of Atlanta Working Paper No. 2008-20

38 Pages Posted: 13 Nov 2008

See all articles by Kevin X. D. Huang

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia; Vanderbilt University - College of Arts and Science - Department of Economics

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Tao A. Zha

Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2008

Abstract

This study explores the macroeconomic implications of adaptive expectations in a standard real business cycle model. When rational expectations are replaced by adaptive expectations, we show that the self-confirming equilibrium is the same as the steady-state rational expectations equilibrium for all admissible parameters but that dynamics around the steady state are substantially different between the two equilibria. The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by the escapes emphasized by Williams (2003). As a result, adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labor market dynamics.

Keywords: self-confirming equilibrium, amplification, labor market dynamics, wealth and substitution effects, hump-shaped responses

JEL Classification: E32

Suggested Citation

Huang, Kevin X. D. and Liu, Zheng and Zha, Tao A., Learning, Adaptive Expectations, and Technology Shocks (September 1, 2008). FRB of Atlanta Working Paper No. 2008-20. Available at SSRN: https://ssrn.com/abstract=1300441 or http://dx.doi.org/10.2139/ssrn.1300441

Kevin X. D. Huang

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Vanderbilt University - College of Arts and Science - Department of Economics ( email )

Box 1819 Station B
Nashville, TN 37235
United States

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Tao A. Zha (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-521-8353 (Phone)
404-521-8956 (Fax)

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