Learning and Expectations in Macroeconomics

(Hardback)

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A crucial challenge for economists is figuring out how people interpret the world and form expectations that will likely influence their economic activity. Inflation, asset prices, exchange rates, investment, and consumption are just some of the economic variables that are largely explained by expectations. Here George Evans and Seppo Honkapohja bring new explanatory power to a variety of expectation formation models by focusing on the learning factor. Whereas the rational expectations paradigm offers the prevailing method to determining expectations, it assumes very theoretical knowledge on the part of economic actors. Evans and Honkapohja contribute to a growing body of research positing that households and firms learn by making forecasts using observed data, updating their forecast rules over time in response to errors. This book is the first systematic development of the new statistical learning approach. Depending on the particular economic structure, the economy may converge to a standard rational-expectations or a "rational bubble" solution, or exhibit persistent learning dynamics.The learning approach also provides tools to assess the importance of new models with expectational indeterminacy, in which expectations are an independent cause of macroeconomic fluctuations. Moreover, learning dynamics provide a theory for the evolution of expectations and selection between alternative equilibria, with implications for business cycles, asset price volatility, and policy. This book provides an authoritative treatment of this emerging field, developing the analytical techniques in detail and using them to synthesize and extend existing research.

Reviews

"An excellent, wide ranging and detailed survey of what is known about the stability under learning of a wide variety of models... [A]n essential reference for researchers."--Margaret Bray, Journal of Economics

Author Bio

George W. Evans is John B. Hamacher Professor of Economics at the University of Oregon, and has held positions at the London School of Economics, Stanford University, and the University of Edinburgh. Seppo Honkapohja is Professor of Economics at the University of Helsinki, where he has currently been appointed Academy Professor. Professors Evans and Honkapohja have published extensively in economic journals, and each is best known for his respective research on expectations and learning in dynamic models. This book is the outgrowth of over fifteen years of collaboration between them.