Unemployment and econometric learning

Singleton, Carl and Schaefer, Daniel (2015): Unemployment and econometric learning.

Abstract

We apply well-known results of the econometric learning literature to the Mortensen-Pissarides real business cycle model. The unique rational expectations equilibrium (REE) is always expectationally stable with decreasing gain learning, and this result is robust to over-parametrisation of the econometric model relative to the minimum state variable form used by agents (Strong E-stability). And so, from this perspective, the assumption of rational expectations in the model is not unreasonable. However, using a parametrisation with UK data, simulations suggest that the implied rate of convergence to the REE with least squares learning is however slow. The cyclical response of unemployment to structural shocks is muted under learning, and a parametrisation which guarantees root-t convergence is generally not consistent with attempts to match the observed volatility of labour market data using the standard model.

• Item Type: MPRA Paper
• Language: English
• Keywords: Real business cycle, unemployment, adaptive learning, expectational stability
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

References

Benhabib, J., & Farmer, R. E. A. (1999). Indeterminacy and sunspots in macroeconomics. In J. B. Taylor, & M. Woodford (Eds.) Handbook of Macroeconomics, vol. 1, Part A, chap. 06, (pp. 387–448). Elsevier, 1 ed.

Benveniste, A., Métivier, M., & Priouret, P. (2012). Adaptive algorithms and stochastic approximations, vol. 22. Springer Science & Business Media.

Berardi, M., & Galimberti, J. K. (2012). On the plausibility of adaptive learning in macroeconomics: A puzzling conflict in the choice of the representative algorithm. Centre for Growth and Business Cycle Research Discussion Paper Series 177, The Univeristy of Manchester.

Berardi, M., & Galimberti, J. K. (2013). A note on exact correspondences between adaptive learning algorithms and the Kalman filter. Economics Letters, 118(1), 139 – 142.

Blanchard, O., & Watson, M. W. (1983). Bubbles, rational expectations and financial markets. NBER Working Papers 0945, National Bureau of Economic Research.

Borowczyk- Martins, D., Jolivet, G., & Postel-Vinay, F. (2013). Accounting for endogeneity in matching function estimation. Review of Economic Dynamics, 16(3), 440 – 451.

Bullard, J., & Mitra, K. (2002). Learning about monetary policy rules. Journal of Monetary Economics, 49(6), 1105 – 1129.

Burgess, S., & Turon, H. (2010). Worker flows, job flows and unemployment in a matching model. European Economic Review, 54(3), 393 – 408.

Carceles-Poveda, E., & Giannitsarou, C. (2007). Adaptive learning in practice. Journal of economic dynamics & control, 31(8), 2659 – 2697.

di Pace, F., Mitra, K., & Zhang, S. (2014). Adaptive Learning and Labour Market Dynamics. CDMA Working Paper Series 201408, Centre for Dynamic Macroeconomic Analysis.

Eusepi, S., & Preston, B. (2011). Expectations, learning, and business cycle fluctutations. The American Economic Review, 101, pp. 2844 – 2872.

Evans, G., & Honkapohja, S. (1986). A complete characterization of ARMA solutions to linear rational expectations models. The Review of Economic Studies, 53(2), 227–239.

Evans, G. W., & Honkapohja, S. (1998). Economic dynamics with learning: New stability results. The Review of Economic Studies, (1), 23.

Evans, G. W., & Honkapohja, S. (2001). Learning and expectations in macroeconomics. Frontiers of economic research. Princeton University Press, Princeton, NJ.

Hagedorn, M., & Manovskii, I. (2008). The cyclical behavior of equilibrium unemployment and vacancies revisited. American Economic Review, 98(4), 1692–1706.

Hodrick, R. J., & Prescott, E. C. (1997). Postwar U.S. business cycles: An empirical investigation. Journal of Money, Credit & Banking, 29(1), 1 – 16.

Kreps, D. M. (1998). Anticipated utility and dynamic choice. Econometric Society Monographs, 29, 242–274.

Mankiw, N. G., Reis, R., & Wolfers, J. (2004). Disagreement about inflation expectations. In NBER Macroeconomics Annual 2003, Volume 18, (pp. 209–270). The MIT Press, Cambridge, MA.

Marcet, A., & Sargent, T. J. (1989). Convergence of least squares learning mechanisms in self-referential linear stochastic models. Journal of Economic Theory, 48(2), 337 – 368.

McCallum, B. T. (1983). On non-uniqueness in rational expectations models: An attempt at perspective.

Journal of Monetary Economics, 11(2), 139 – 168. Milani, F. (2007). Expectations, learning and macroeconomic persistence. Journal of Monetary Economics, 54(7), 2065–2082.

Milani, F. (2011). Expectation shocks and learning as drivers of the business cycle. The Economic Journal, 121(552), 379–401.

Mortensen, D. T., & Pissarides, C. A. (1994). Job creation and job destruction in the theory of unemployment. Review of Economic Studies, 61(3), 397–415.

Petrongolo, B., & Pissarides, C. A. (2001). Looking into the black box: A survey of the matching function. Journal of Economic Literature, 39(2), 390–431.

Pfajfar, D., & Santoro, E. (2010). Heterogeneity, learning and information stickiness in inflation expectations. Journal of Economic Behavior & Organization, 75(3), 426–444.

Pissarides, C. A. (2000). Equilibrium unemployment theory. The MIT Press, Cambridge, MA.

Rogerson, R., & Shimer, R. (2011). Search in macroeconomic models of the labor market. In O. Ashenfelter, & D. Card (Eds.) Handbook of Labor Economics, vol. 4, Part A, (pp. 619 -700). Elsevier, North Holland.

Sahin, A., Song, J., Topa, G., & Violante, G. L. (2014). Mismatch unemployment. THE AMERICAN ECONOMIC REVIEW, 104(11), 3529–3564.

Shimer, R. (2005). The cyclical behavior of equilibrium unemployment and vacancies. American Economic Review, 95(1), 25–49.