Learning in Macroeconomics Yougui Wang Department of Systems Science School of Management, BNU
A Reduced Form of Macroeconomics The symbols y t is a vector of endogenous variables w t is a vector of stochastic exogenous variables Y e t+1 is a vector of expectations of future endogenous variables The current endogenous variable depends on Time lagged variable expectations Exogenous variables The precise information set available to economic agents for forming expectations
Rational Expectation Definition Muth (1961), Econometrica 29:315–35 Lucas (1972), J. Econ. Theory 4:103–24 Sargent (1973), Brookings Pap. Econ. Act. 2:429–72 Strong assumptions The model is specified and correct All parameters are estimated and right All agents are rational All agents know the correct model and the parameters All agents know that other agents are rational
Learning Approach RE is the natural benchmark, it is implausibly strong Economic agents should be assumed to be about as smart as (good) economists We could choose to model households and firms as economic theorists or, alternatively, model them as econometricians We need a more realistic model of rationality, which may, however, be consistent with agents eventually learning to have RE Neither private agents nor economists at central banks know the true model Economists formulate and estimate models. These models are re-estimated and possibly reformulated as new data become available. Economists themselves engage in processes of learning about the economy
Learning and Macroeconomic Policy First, some of the proposed interest rate rules may not perform well when the expectations of the agents are out of equilibrium. The consequences of errors in forecasting, and the resulting correction mechanisms, may create instability in the economy. Second, monetary policy rules, including some formulations for optimal setting of the instrument and some Taylor rules based on forecasts of inflation and output gap, can create multiple equilibria, also called indeterminacy of equilibria.