Unemployment and econometric learning

Citation

Schaefer D & Singleton C (2018) Unemployment and econometric learning. Research in Economics, 72 (2), pp. 277-296. https://doi.org/10.1016/j.rie.2017.10.005

Abstract
We apply well-known results of the econometric learning literature to the Mortensen and 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.

Keywords
Real business cycle; Unemployment; Adaptive learning; Expectational stability

Journal
Research in Economics: Volume 72, Issue 2