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American Economic Journal: Macroeconomics: Vol. 4 No. 2 (April 2012)

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Learning in a Medium-Scale DSGE Model with Expectations Based on Small Forecasting Models

Article Citation

Slobodyan, Sergey, and Raf Wouters. 2012. "Learning in a Medium-Scale DSGE Model with Expectations Based on Small Forecasting Models." American Economic Journal: Macroeconomics, 4(2): 65-101.

DOI: 10.1257/mac.4.2.65

Abstract

This paper evaluates the empirical performance of a medium-scale DSGE model with agents forming expectations using small forecasting models updated by the Kalman filter. The adaptive learning model fits the data better than the rational expectations (RE) model. Beliefs about the inflation persistence explain the observed decline in the mean and the volatility of inflation as well as Phillips curve flattening. Learning about inflation results in lower estimates for the persistence of the exogenous shocks that drive price and wage dynamics in the RE version of the model. Expectations based on small forecasting models are closely related to the survey evidence on inflation expectations. (JEL C53, D83, D84, E13, E17, E31)

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Authors

Slobodyan, Sergey (CERGE-EI, Prague)
Wouters, Raf (National Bank of Belgium and Catholic U Louvain)

JEL Classifications

C53: Forecasting Methods; Simulation Methods
D83: Search; Learning; Information and Knowledge; Communication; Belief
D84: Expectations; Speculations
E13: General Aggregative Models: Neoclassical
E17: General Aggregative Models: Forecasting and Simulation: Models and Applications
E31: Price Level; Inflation; Deflation

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