Learning, adaptive expectations, and technology shocks

Kevin Huang (), Zheng Liu and Tao Zha

No 2008-20, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

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: Equilibrium; (Economics) (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba and nep-dge
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Learning, Adaptive Expectations and Technology Shocks (2009)
Journal Article: Learning, Adaptive Expectations and Technology Shocks (2009)
Working Paper: Learning, adaptive expectations, and technology shocks (2008)
Working Paper: Learning, Adaptive Expectations, and Technology Shocks (2008)
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