Learning in a Medium-Scale DSGE Model with Expectations Based on Small Forecasting Models
American Economic Journal: Macroeconomics
vol. 4,
no. 2, April 2012
(pp. 65-101)
Abstract
This paper evaluates the empirical performance of a medium-scale DSGE model with agents forming expectations using small forecasting models updated by the Kalman filter. The adaptive learning model fits the data better than the rational expectations (RE) model. Beliefs about the inflation persistence explain the observed decline in the mean and the volatility of inflation as well as Phillips curve flattening. Learning about inflation results in lower estimates for the persistence of the exogenous shocks that drive price and wage dynamics in the RE version of the model. Expectations based on small forecasting models are closely related to the survey evidence on inflation expectations. (JEL C53, D83, D84, E13, E17, E31)Citation
Slobodyan, Sergey, and Raf Wouters. 2012. "Learning in a Medium-Scale DSGE Model with Expectations Based on Small Forecasting Models." American Economic Journal: Macroeconomics, 4 (2): 65-101. DOI: 10.1257/mac.4.2.65Additional Materials
JEL Classification
- C53 Forecasting Methods; Simulation Methods
- D83 Search; Learning; Information and Knowledge; Communication; Belief
- D84 Expectations; Speculations
- E13 General Aggregative Models: Neoclassical
- E17 General Aggregative Models: Forecasting and Simulation: Models and Applications
- E31 Price Level; Inflation; Deflation
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