Article ID Journal Published Year Pages File Type
5098394 Journal of Economic Dynamics and Control 2014 21 Pages PDF
Abstract
The estimation results show that private agents appear to have often switched to constant-gain learning, with a high constant gain, during most of the 1970s and until the early 1980s, while reverting to a decreasing gain later on. As a result, the model can generate a pattern of volatility, which is increasing in the 1970s and falling in the second half of the sample, with a decline that can roughly match the magnitude of the so-called “Great Moderation” in the 1984-2007 period. The paper also documents how a failure to incorporate learning into the estimation may lead econometricians to spuriously find time-varying volatility in the exogenous shocks, even when these have constant variance by construction.
Related Topics
Physical Sciences and Engineering Mathematics Control and Optimization
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