Show simple item record Murray, James 2008-05-06T18:56:59Z 2008-05-06T18:56:59Z 2008-04-30
dc.identifier.uri en
dc.identifier.uri en
dc.description.abstract This paper examines the "bad luck" explanation for changing volatility in U.S. inflation and output when agents do not have rational expectations, but instead form expectations through least squares learning with an endogenously changing learning gain. It has been suggested that this type of endogenously changing learning mechanism can create periods of excess volatility without the need for changes in the variance of the underlying shocks. Bad luck is modeled into a standard New Keynesian model by augmenting it with two states that evolve according to a Markov chain, where one state is characterized by large variances for structural shocks, and the other state has relatively smaller variances. To assess whether learning can explain the Great Moderation, the New Keynesian model with volatility regime switching and dynamic gain learning is estimated by maximum likelihood. The results show that learning does lead to lower variances for the shocks in the volatile regime, but changes in regime is still significant in differences in volatility from the 1970s and after the 1980s. en
dc.format.extent 713120 bytes
dc.format.mimetype application/pdf
dc.language.iso en_US en
dc.publisher Center for Applied Economics and Policy Research en
dc.relation.ispartofseries CAEPR Working Papers en
dc.relation.ispartofseries 2008-011 en
dc.relation.isversionof This paper is also available on SSRN and RePEc. en
dc.subject CAEPR en
dc.subject Center for Applied Economics and Policy Research en
dc.subject Learning en
dc.subject regime switching en
dc.subject great moderation en
dc.subject New Keynesian model en
dc.subject maximum likelihood en
dc.subject Monetary Economics en
dc.title Regime Switching, Learning, and the Great Moderation en
dc.type Working Paper en

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