Unemployment and Econometric Learning
Schaefer, D. and C. Singleton. 2018. "Unemployment and econometric learning." Research in Economics, 72(2): 277-296. DOI: 10.1016/j.rie.2017.10.005
38 Pages Posted: 21 Jan 2016 Last revised: 29 May 2019
Date Written: January 2, 2017
We apply well-known results of the econometric learning literature to the Mortensen-Pissarides real business cycle model. Agents can always learn the unique rational expectations equilibrium (REE), for all possible well-defined sets of parameter values, by using the minimum-state-variable solution to the model and decreasing gain learning. From this perspective the assumption of rational expectations in the model could be seen as reasonable. But using a parametrisation with UK data, simulations show that the speed of convergence to the REE is slow. This type of learning dampens the cyclical response of unemployment to small structural shocks.
Keywords: real business cycle, unemployment, adaptive learning, expectational stability
JEL Classification: E24, E32, J64
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