Unemployment and econometric learning

Schaefer, D. and Singleton, C. ORCID: https://orcid.org/0000-0001-8247-8830 (2018) Unemployment and econometric learning. Research in Economics, 72 (2). pp. 277-296. ISSN 1090-9443 doi: 10.1016/j.rie.2017.10.005

Abstract/Summary

We apply well-known results of the econometric learning literature to the Mortensen-Pissarides real business cycle model. Agents can always learn the unique rational expectations equilibrium (REE), for all possible well-defined sets of parameter values, by using the minimum-state-variable solution to the model and decreasing gain learning. From this perspective the assumption of rational expectations in the model could be seen as reasonable. But using a parametrisation with UK data, simulations show that the speed of convergence to the REE is slow. This type of learning dampens the cyclical response of unemployment to small structural shocks.