An Econometric Analysis of Polish Inflation Dynamics with Learning about Rational Expectations |
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Authors: | Peter A Zadrozny |
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Institution: | (1) 43-15, 46th Street, Long Island City, NY 11104, USA |
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Abstract: | Rational expectations modelling has been criticized for assuming that economic agents can learn quickly about and compute
rational price expectations. In response, various authors have studied theoretical models in which economic agents use adaptive
statistical rules to develop price expectations. A goal of this literature has been to compare resulting learning equilibria
with rational expectations equilibria. The lack of empirical analysis in this literature suggests that adaptive learning makes
otherwise linear dynamic models nonlinearly intractable for current econometric technology. In response to the lack of empirical
work in this literature, this paper applies to post-1989 monthly data for Poland a new method for modelling learning about
price expectations. The key idea of the method is to modify Cagan’s backward-looking adaptive-expectations hypothesis about
the way expectations are actually updated to a forward-looking characterization which instead specifies the result of learning.
It says that, whatever the details of how learning actually takes places, price expectations are expected to converge geometrically
to rationality. The method is tractable because it involves linear dynamics. The paper contributes substantively by analyzing
the recent Polish inflation, theoretically by characterizing learning, and econometrically by using learning as a restriction
for identifying (i.e., estimating wth finite variance) unobserved price expectations with the Kalman filter.
This revised version was published online in July 2006 with corrections to the Cover Date. |
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Keywords: | backward-looking adaptive expectations hypothesis forward-looking characterization price expectations rational expectations modelling |
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