Business Intelligence

Learning In An Estimated Medium-Scale DSGE Model

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Executive Summary

In this paper, the authors evaluate the empirical relevance of learning by private agents in an estimated medium - scale DSGE model. They replace the standard rational expectation assumption in the Smets and Wouters (2007) model by a constant gain learning mechanism. If agents know the correct structure of the model and only learn about the parameters, both expectation mechanisms result in a similar fit, and only the transition dynamics that are generated by specific initial beliefs are responsible for the differences between the two approaches.

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