We compare the performance of alternative recursive forecasting models. A simple constant gain algorithm, used widely in the learning literature, both forecasts well out of sample and also provides the best fit to the Survey of Professional Forecasters.

Agents have two forecasting models, one consistent with the unique rational expectations equilibrium, another that assumes a time-varying parameter structure. When agents use Bayesian updating to choose between models in a self-referential system, we find that learning dynamics lead to selection...

This paper introduces model uncertainty into a simple Lucas-type monetary model. Inflation depends on agents' expectations and a vector of exogenous random variables. Following (Branch and Evans 2004) agents are assumed to underparameterize their forecasting models. A Misspecification...

This paper identifies two channels through which the economy can generate endogenous inflation and output volatility, an empirical regularity, by introducing model uncertainty into a Lucas-type monetary model. The equilibrium path of inflation depends on agents' expectations and a vector of...

This paper identifies two channels through which the economy can generate endogenous inflation and output volatility, an empirical regularity, by introducing model uncertainty into a Lucas-type monetary model. The equilibrium path of inflation depends on agents' expectations and a vector of...

Earlier studies of the seigniorage inflation model have found that the high-inflation steady state is not stable under adaptive learning. We reconsider this issue and analyze the full set of solutions for the linearized model. Our main focus is on stationary hyperinflationary paths near the...

Full commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. Different types of reactions functions to implement and instrument rules to approximate full commitment have been proposed in the literature. We assess optimal reaction...

We investigate both the rational explosive inflation paths studied by McCallum (2001) and the classification of fiscal and monetary policies proposed by Leeper (1991) for stability under learning of rational expectations equilibria (REE).Our first result is that the fiscalist REE in the model of...

We review the recent work on interest rate setting, which emphasizes the desirability of designing policy to ensure stability under private agent learning.Appropriately designed expectations based rules can yield optimal rational expectations equilibria that are both determinate and stable under...

Using New Keynesian models, we compare Friedman's k-percent money supply rule to optimal interest rate setting, with respect to determinacy, stability under learning and optimality.We first review the recent literature.Open-loop interest rate rules are subject to indeterminacy and instability...