Unemployment and econometric learning |
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Authors: | Daniel Schaefer Carl Singleton |
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Affiliation: | School of Economics, The Univeristiy of Edinburgh, 31 Buccleuch Place, EH8 9JT, UK |
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Abstract: | We apply well-known results of the econometric learning literature to the Mortensen and 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. |
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Keywords: | Real business cycle Unemployment Adaptive learning Expectational stability E24 E32 J64 |
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