This paper models expectation formation by taking into account that agents may produce heterogeneous expectations because of informational frictions and differing levels of a capacity to process information. We show that there are two general classes of steady states within this framework: those...

I present a simple model where forecasting confidence affects aggregate demand. It is shown that this model has similar stability properties, under statistical and evolutionary learning, as a model without a confidence affect. From this setup, I introduce “Expectational Business Cycles”...

Does a change in the public׳s holdings of government debt affect the term structure of interest rates? Empirical analysis using a VAR model indicates that a rise in these holdings of the real debt-to-GDP ratio increases both the three-month and ten-year U.S. nominal yields in a statistically...

Recent research shows that several DSGE models provide a closer fit to the data under adaptive learning. This paper extends this research by introducing adaptive learning in the model of Krusell and Smith (1998) with uninsurable idiosyncratic risks and aggregate uncertainty. A first contribution...

We extend a continuous-time approximation approach to the analysis of escape dynamics in economic models with constant gain adaptive learning. This approach is based on the application of the results of continuous-time version of large deviations theory to the linear diffusion approximation of...

We examine the stability under learning (E-stability) of sunspot equilibria in non-convex real business cycle models. The production technology is Cobb–Douglas with externalities generated by factor inputs. We establish that, with a general utility function, the well-known Benhabib–Farmer...

This paper derives a general New Keynesian framework with heterogeneous expectations by explicitly solving the micro-foundations underpinning the model. The resulting reduced form is analytically tractable and encompasses the representative rational agent benchmark as a special case. We specify...

We present a model of structural change which, distinctively, sub-divides services (S) into ‘Progressive Services’ (PS) and ‘Asymptotically Stagnant Services’ (AS), to better reflect the advent of the New Economy. A manufacturing (M) sector is also included, and non-homothetic...

This paper presents a DSGE model in which agents׳ learning about the economy can endogenously generate time-varying macroeconomic volatility. Economic agents use simple models to form expectations and need to learn the relevant parameters. Their gain coefficient is endogenous and is adjusted...

Using laboratory experiments within a New Keynesian sticky price framework, we study the process of inflation expectation formation. We focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics. Using a test for rational...