Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature, which is in sharp contrast to the implausibly lo...

What is the impact of surprise and anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations? We examine this issue using the standard stochastic real business cycle model with lump-sum taxes. Agents combine knowledge about future policy with econometric forecasts of future wages and interest rates. Dynamics under learning can have large ...

This paper introduces dynamic predictor selection into a New Keynesian model with heterogeneous expectations and examines its implications for monetary policy. We extend Branch and McGough (2006) by endogenizing the fraction of rational versus adaptive agents along the lines of Brock and Hommes (1997). We show that models that are determinate under the assumption of full rationality may possess...

Models of macroeconomic learning are populated by agents who possess a great deal of knowledge of the “true” structure of the economy, and yet ignore the impact of their own learning on that structure; they may learn about an equilibrium, but they do not learn within it. An alternative learning model is presented where agents’ decisions are informed by hypotheses they hold regarding the economy...

Fully rational agents are allowed to optimize over expectations formation technologies in an environment where it is costly to collect and process information. It is shown in a general equilibrium framework that optimization over expectations by rational and forward oriented agents can lead to endogenous instability. Specifically, we illustrate that resulting equilibria can be both chaotic and ...

In important situations, individual decision-making is systematically biased. When deciding (rather than consuming), extrinsic attributes of choice options are more salient than intrinsic attributes. People overestimate extrinsic attributes and therefore put too much effort into acquiring income and gaining status, lowering their utility level. These mistakes are accentuated in authoritarian sy...

This paper examines the impact of public information in an economy where agents also have diverse private information. Since disclosures by central banks are an important source of public information, we are able to assess how the words of central bankers shape expectations, in addition to their actions. In an otherwise standard macro model, the disproportionate role of public information degra...

Earlier studies of the seigniorage inflation model have found that the high-inflation steady state is not stable under adaptive learning. We reconsider this issue and analyze the full set of solutions for the linearized model. Our main focus is on stationary hyperinflationary paths near the high-inflation steady state. The hyperinflationary paths are stable under learning if agents can utilize ...