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Learning and structural change in macroeconomic data

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Author Info
James B. Bullard
John Duffy

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Abstract

We include learning in a standard equilibrium business cycle model with explicit growth. We use the model to study how the economy's agents could learn in real time about the important trend-changing events of the postwar era in the U.S., such as the productivity slowdown, increased labor force participation by women, and the "new economy" of the 1990s. We find that a large fraction of the observed variance of output relative to trend can be attributed to structural change in our model. However, we also find that the addition of learning and occasional structural breaks to the standard and widely-used growth model results in a balanced growth puzzle, as our approach cannot completely account for observed trends in U.S. aggregate consumption and investment. Finally, we argue that a model-consistent detrending approach, such as the one we suggest here, is necessary if the goal is to obtain an accurate assessment of an equilibrium business cycle model.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-016.

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Date of creation: 2004
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Handle: RePEc:fip:fedlwp:2004-016

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Keywords: Business cycles ; Economic development;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22. [Downloadable!]
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  2. James B. Bullard & Stefano Eusepi, 2004. "Did the Great Inflation occur despite policymaker commitment to a Taylor rule?," Working Papers 2003-013, Federal Reserve Bank of St. Louis. [Downloadable!]
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  3. Rotemberg, Julio J & Woodford, Michael, 1996. "Real-Business-Cycle Models and the Forecastable Movements in Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 86(1), pages 71-89, March.
  4. Kevin J. Lansing, 2002. "Learning about a shift in trend output: implications for monetary policy and inflation," Working Papers in Applied Economic Theory 2000-16, Federal Reserve Bank of San Francisco. [Downloadable!]
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  5. James A. Kahn & Robert W. Rich, 2003. "Tracking the new economy: using growth theory to detect changes in trend productivity," Proceedings, Federal Reserve Bank of San Francisco, issue Nov. [Downloadable!]
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  6. Julio J. Rotemberg, 2003. "Stochastic Technical Progress, Smooth Trends, and Nearly Distinct Business Cycles," American Economic Review, American Economic Association, vol. 93(5), pages 1543-1559, December. [Downloadable!]
  7. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341. [Downloadable!] (restricted)
  8. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  9. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," RCER Working Papers 467, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
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  10. Canova, Fabio, 1998. "Detrending and business cycle facts," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 475-512, May. [Downloadable!] (restricted)
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  11. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November. [Downloadable!] (restricted)
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  12. Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band Pass Filter," NBER Working Papers 7257, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band pass filter," Working Paper 9906, Federal Reserve Bank of Cleveland. [Downloadable!]
    • Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05. [Downloadable!] (restricted)
  13. Kevin J. Lansing, 2002. "Real-time estimation of trend output and the illusion of interest rate smoothing," Economic Review, Federal Reserve Bank of San Francisco, pages 17-34. [Downloadable!]
  14. Kydland, Finn E & Prescott, Edward C, 1991. " The Econometrics of the General Equilibrium Approach to Business Cycles," Scandinavian Journal of Economics, Blackwell Publishing, vol. 93(2), pages 161-78.
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  15. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
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  16. David Andolfatto & Paul Gomme, 2003. "Monetary Policy Regimes and Beliefs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 1-30, February. [Downloadable!] (restricted)
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  17. Harvey, Andrew, 1997. "Trends, Cycles and Autoregressions," Economic Journal, Royal Economic Society, vol. 107(440), pages 192-201, January. [Downloadable!] (restricted)
  18. Canova, Fabio, 1998. "Detrending and business cycle facts: A user's guide," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 533-540, May. [Downloadable!] (restricted)
  19. Cogley, Timothy, 2005. "How fast can the new economy grow? A Bayesian analysis of the evolution of trend growth," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 179-207, June. [Downloadable!] (restricted)
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  20. Bruce E. Hansen, 2001. "The New Econometrics of Structural Change: Dating Breaks in U.S. Labour Productivity," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 117-128, Fall. [Downloadable!] (restricted)
  21. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Blackwell Publishing, vol. 65(3), pages 395-432, July. [Downloadable!] (restricted)
  22. Michael R. Pakko, 2002. "What Happens When the Technology Growth Trend Changes?: Transition Dynamics, Capital Growth and the 'New Economy'," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 376-407, April. [Downloadable!] (restricted)
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  23. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
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  24. Packalen, M., 2000. "On the Learnability of Rational Expectations Equilibria in Three Business Cycle Models," University of Helsinki, Department of Economics 87, Department of Economics.
  25. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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  26. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2008. "Learning, Adaptive Expectations,and Technology Shocks," Emory Economics 0803, Department of Economics, Emory University (Atlanta). [Downloadable!]
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  2. Sharon Kozicki & P.A. Tinsley, 2007. "Perhaps the FOMC Did What It Said It Did: An Alternative Interpretation of the Great Inflation," Working Papers 07-19, Bank of Canada. [Downloadable!]
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  3. Yu-chin Chen & Pisut Kulthanavit, 2007. "Adaptive Learning and Monetary Policy: Lessons from Japan," Working Papers UWEC-2008-12, University of Washington, Department of Economics. [Downloadable!]
  4. Wiliam Branch & George W. Evans, 2005. "A Simple Recursive Forecasting Model," University of Oregon Economics Department Working Papers 2005-3, University of Oregon Economics Department, revised 01 Feb 2005. [Downloadable!]
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  5. James Bullard & Stefano Eusepi, 2005. "Did the Great Inflation Occur Despite Policymaker Commitment to a Taylor Rule?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 324-359, April. [Downloadable!] (restricted)
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  6. Sharon Kozicki & P.A. Tinsley, 2003. "Permanent and Transitory Policy Shocks in an Empirical Macro Model with Asymmetric Information," CFS Working Paper Series 2003/41, Center for Financial Studies. [Downloadable!]
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  7. James Murray, 2008. "Empirical Significance of Learning in a New Keynesian Model with Firm-Specific Capital," Caepr Working Papers 2007-027, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
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