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  5. A Unified Model of Learning to Forecast

A Unified Model of Learning to Forecast

  • George W. Evans
  • Christopher G. Gibbs
  • Bruce McGough
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

We propose a model of boundedly rational and heterogeneous expectations that unifies adaptive learning, k-level reasoning, and replicator dynamics. Level-0 forecasts evolve over time via adaptive learning. Agents revise over time their depth of reasoning in response to forecast errors, observed and counterfactual. The unified model makes sharp predictions for when and how fast markets converge in Learning-to-Forecast Experiments, including novel predictions for individual and market behavior in response to announced events. We present experimental results that support these predictions. We apply our unified approach in the New Keynesian model to study forward guidance policy.

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