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Learning process and rational expectations: an analysis using a small macroeconomic model for New Zealand

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Abstract

The nature of expectations matters when conducting monetary policy. Models with a learning process can exhibit very different properties from models with other types of expectations rules. This paper draws on the work of Orphanides and Williams (2002), extending it to allow for the possibility that the learning process may not be perpetual, but rather might be converging towards a rational expectations equilibrium. By modelling expectations using a learning process, we obtain evidence suggesting that inflation expectations in New Zealand are moving towards rational expectations. Theory suggests this will make it easier to control inflation after a temporary disturbance.

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  • Olivier Basdevant, 2003. "Learning process and rational expectations: an analysis using a small macroeconomic model for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/05, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2003/05
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    Cited by:

    1. Shahram Fattahi, 2012. "Economic Growth, Inflation and Wage Growth: Experience from a Developing Country," Business and Management Research, Business and Management Research, Sciedu Press, vol. 1(2), pages 88-93, June.
    2. Gabriele Galati & William R. Melick, 2006. "The evolving inflation process: an overview," BIS Working Papers 196, Bank for International Settlements.
    3. Özer Karagedikli & Rishab Sethi & Christie Smith & Aaron Drew, 2008. "Changes in the transmission mechanism of monetary policy in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/03, Reserve Bank of New Zealand.
    4. Bernard Hodgetts, 2006. "Changes in the inflation process in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 1-30., March.
    5. Gernot Pehnelt, 2007. "Globalisation and Inflation in OECD Countries," Jena Economics Research Papers 2007-055, Friedrich-Schiller-University Jena.
    6. Damjan Pfajfar & Emiliano Santoro, 2007. "Heterogeneity, Asymmetries and Learning in InfIation Expectation Formation: An Empirical Assessment," Money Macro and Finance (MMF) Research Group Conference 2006 123, Money Macro and Finance Research Group.

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    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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