Premium
ORDINARY LEAST SQUARES LEARNING AND NONLINEARITIES IN MACROECONOMICS
Author(s) -
Gomes Orlando
Publication year - 2010
Publication title -
journal of economic surveys
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.657
H-Index - 92
eISSN - 1467-6419
pISSN - 0950-0804
DOI - 10.1111/j.1467-6419.2009.00580.x
Subject(s) - economics , futures studies , context (archaeology) , adaptive learning , econometrics , process (computing) , outcome (game theory) , ordinary least squares , mathematical economics , simple (philosophy) , adaptive expectations , persistence (discontinuity) , macroeconomics , computer science , rational expectations , paleontology , philosophy , geotechnical engineering , epistemology , artificial intelligence , engineering , biology , operating system
The paper reviews the literature on adaptive learning in macroeconomic settings where the formation of expectations is particularly relevant. Special attention will be given to simple two‐period overlapping generations models with a unique fixed point perfect foresight equilibrium; in this kind of scenario, eventual long‐term periodic and a‐periodic cycles are exclusively the result of the process of learning. The outcome that high rates of money growth have a potentially destabilizing effect generating periodic fluctuations and chaos is emphasized. The persistence of systematic forecast errors in a scenario where agents are supposed to act rationally is relevant in this context and it will be thoroughly discussed resorting to the notions of self‐fulfilling mistakes, consistent expectations equilibria and beliefs equilibria.