Time-Varying Parameters and Endogenous Learning Algorithms

The adaptive learning has primarily focused on decreasing gain learning and constant gain learning. As pointed out theoretically by Marcet and Nicolini (2003) and empirically by Milani (2007) an endogenous learning mechanism may explain key economic behaviors, such as recurrent hyperinflation or time varying volatility. This paper evaluates the mechanism used in those papers in addition to proposing an alternative endogenous learning algorithm. The proposed algorithm outperforms the Marcet and Nicolini's algorithm in simulations and may result in exotic dynamics.