Adaptive Learning and Macroeconomic Inertia in the Euro Area

21 Pages Posted: 6 May 2009

See all articles by Fabio Milani

Fabio Milani

University of California, Irvine - Department of Economics

Abstract

This article aims to study the determinants of macroeconomic inertia in the euro area. To this end, it estimates a simple monetary DSGE model with private-sector learning, but which also includes more structural sources of inertia, such as habit formation in consumption and inflation indexation. Economic agents are assumed to form near-rational expectations and to learn the model parameters over time. Likelihood-based Bayesian methods are used to estimate the agents' beliefs jointly within the system and to provide evidence on the fit of alternative learning rules. The results show that European macroeconomic inertia has only moderately changed over the sample. The evidence is consistent with a small gain coefficient and low degrees of habits and indexation, although some uncertainty remains after the estimation.

Suggested Citation

Milani, Fabio, Adaptive Learning and Macroeconomic Inertia in the Euro Area. JCMS: Journal of Common Market Studies, Vol. 47, Issue 3, pp. 579-599, June 2009, Available at SSRN: https://ssrn.com/abstract=1399739 or http://dx.doi.org/10.1111/j.1468-5965.2009.01816.x

Fabio Milani (Contact Author)

University of California, Irvine - Department of Economics ( email )

3151 Social Science Plaza
Irvine, CA 92697-5100
United States

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