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Learning the Ramsey outcome in a Kydland & Prescott economy

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  • Jasmina ARIFOVIC
  • Murat YILDIZOGLU

Abstract

We study learning in the Kydland and Prescott environment. Our policy maker evaluates its potential strategies regarding the announced and the actual inflation rate using its mental model. This model is forward looking and adaptive at the same time. \r\nThere are two types of agents: Believers who set their inflation forecast equal to the announced inflation, and nonbelievers who form static optimal forecast coupled with a forecast error correction mechanism. Our results show that the economy can reach near Ramsey outcomes most of the time. In the absence of believers, the economies almost always converge to the Ramsey outcome. \r\nIn their experiments with human subjects, Arifovic and Sargent (2003) showed that experimental economies reach and stay close to the Ramsey outcome most of the time, giving support to the \'just do it\' policy recommendation. In light of the experimental findings, our model is of particular interest as it is the only agent-based or adaptive learning model that consistently selects the Ramsey outcome.

Suggested Citation

  • Jasmina ARIFOVIC & Murat YILDIZOGLU, 2014. "Learning the Ramsey outcome in a Kydland & Prescott economy," Cahiers du GREThA (2007-2019) 2014-06, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    • Handle: RePEc:grt:wpegrt:2014-06
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    References listed on IDEAS

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    More about this item

    Keywords

    learning in the Kydland-Prescott environment; artificial neural networks; Ramsey outcome;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D60 - Microeconomics - - Welfare Economics - - - General

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