Parameter Learning in General Equilibrium: The Asset Pricing Implications
70 Pages Posted: 10 Dec 2013 Last revised: 13 Dec 2013
Date Written: December 2013
Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models with unknown parameters governing either long-run economic growth, the variance of shocks, rare events, or model selection. Overall, parameter learning generates long-lasting, quantitatively significant additional macro risks that help explain standard asset pricing puzzles.
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