Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212187 
Year of Publication: 
2011
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 8/2011
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Expectations play a central role in modern macroeconomics. The econometric learning approach, in line with the cognitive consistency principle, models agents as forming expectations by estimating and updating subjective forecasting models in real time. This approach provides a stability test for RE equilibria and a selection criterion in models with multiple equilibria. Further features of learning such as discounting of older data, use of misspecified models or heterogeneous choice by agents between competing models generate novel learning dynamics. Empirical applications are reviewed and the roles of the planning horizon and structural knowledge are discussed. We develop several applications of learning with relevance to macroeconomic policy: the scope of Ricardian equivalence, appropriate specification of interest-rate rules, implementation of price-level targeting to achieve learning stability of the optimal RE equilibrium and whether, under learning, price-level targeting can rule out the deflation trap at the zero lower bound.
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-671-2
Document Type: 
Working Paper

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