Learning as a Rational Foundation for Macroeconomics and Finance
63 Pages Posted: 12 Apr 2011
Date Written: March 24, 2011
Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for RE equilibria and a selection criterion in models with multiple equilibria. Further features of learning – such as discounting of older data, use of misspecified models or heterogeneous choice by agents between competing models – generate novel learning dynamics. Empirical applications are reviewed and the roles of the planning horizon and structural knowledge are discussed. We develop several applications of learning with relevance to macroeconomic policy: the scope of Ricardian equivalence, appropriate specification of interest-rate rules, implementation of price-level targeting to achieve learning stability of the optimal RE equilibrium and whether, under learning, price-level targeting can rule out the deflation trap at the zero lower bound.
Keywords: cognitive consistency, E-stability, least-squares, persistent learning dynamics, business cycles, monetary policy, asset prices
JEL Classification: E32, D83, D84, C62
Suggested Citation: Suggested Citation