
Contents
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2.1 Introduction 2.1 Introduction
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2.2 Methodological Issues in Bounded Rationality and Learning 2.2 Methodological Issues in Bounded Rationality and Learning
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2.2.1 Least-Squares Learning and Expectational Stability 2.2.1 Least-Squares Learning and Expectational Stability
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2.2.2 Structural Change and Misspecification 2.2.2 Structural Change and Misspecification
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2.2.2.1 Misspecification and Restricted Perceptions Equilibria 2.2.2.1 Misspecification and Restricted Perceptions Equilibria
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2.2.2.2 Constant-Gain Learning and Escape Dynamics 2.2.2.2 Constant-Gain Learning and Escape Dynamics
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2.2.2.3 Heterogeneous Expectations 2.2.2.3 Heterogeneous Expectations
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2.2.2.4 Dynamic Predictor Selection 2.2.2.4 Dynamic Predictor Selection
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2.3 Learning and Empirical Research 2.3 Learning and Empirical Research
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2.3.1 Rise and Fall of Inflation 2.3.1 Rise and Fall of Inflation
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2.3.2 Latin American Inflation 2.3.2 Latin American Inflation
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2.3.3 Real Business Cycle Applications 2.3.3 Real Business Cycle Applications
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2.3.4 Asset Pricing and Learning 2.3.4 Asset Pricing and Learning
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2.3.5 Estimated Models with Learning 2.3.5 Estimated Models with Learning
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2.4 Further Issues in Modeling Learning 2.4 Further Issues in Modeling Learning
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2.4.1 The Planning Horizon 2.4.1 The Planning Horizon
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2.4.2 Structural Knowledge 2.4.2 Structural Knowledge
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2.4.2.1 Eductive Stability under Full Structural Knowledge 2.4.2.1 Eductive Stability under Full Structural Knowledge
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2.4.2.2 Partial Structural Knowledge 2.4.2.2 Partial Structural Knowledge
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2.4.2.3 Application: Ricardian Equivalence When Expectations Are Not Rational 2.4.2.3 Application: Ricardian Equivalence When Expectations Are Not Rational
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2.5 Learning and Monetary Policy 2.5 Learning and Monetary Policy
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2.5.1 Learning and the Choice of the Interest Rate Rule 2.5.1 Learning and the Choice of the Interest Rate Rule
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2.5.1.1 The Basic Model 2.5.1.1 The Basic Model
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2.5.1.2 Policy and Infinite-Horizon Learning 2.5.1.2 Policy and Infinite-Horizon Learning
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2.5.2 Application: Price-Level Targeting and Optimal Policy 2.5.2 Application: Price-Level Targeting and Optimal Policy
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2.5.2.1 A Fundamentals-Based Reaction Function 2.5.2.1 A Fundamentals-Based Reaction Function
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2.5.2.2 An Expectations-Based Reaction Function 2.5.2.2 An Expectations-Based Reaction Function
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2.5.3 Price-Level Targeting and the Zero Lower Bound 2.5.3 Price-Level Targeting and the Zero Lower Bound
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2.6 Conclusion 2.6 Conclusion
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Appendix 2.A E-Stability Conditions in Multivariate Linear Models Appendix 2.A E-Stability Conditions in Multivariate Linear Models
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Appendix 2.B E-Stability in the Model of Section 2.5.3 Appendix 2.B E-Stability in the Model of Section 2.5.3
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References References
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Two Learning as a Rational Foundation for Macroeconomics and Finance
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Published:January 2013
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Abstract
This chapter examines the central ideas about learning and bounded rationality for macroeconomics and finance. It first introduces the main methodological issues concerning expectation formation and learning before discussing the circumstances in which rational expectations may arise. It then reviews empirical work that applies learning to macroeconomic issues and asset prices, along with the implications of the use of structural knowledge in learning and the form of the agents' decision rules. As an application, the scope of Ricardian Equivalence is considered. The chapter also presents three applications of the learning approach to monetary policy: the appropriate specification of interest rate rules; implementation of price-level targeting to achieve learning stability of the optimal rational expectations equilibrium; and whether under learning, commitment to price-level targeting can be sufficient to rule out the deflation trap of a zero interest rate lower bound and return the economy to the intended rational expectations steady state.
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