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AN ESTIMATED DSGE MODEL WITH LEARNING BASED ON TERM STRUCTURE INFORMATION

Published online by Cambridge University Press:  31 October 2019

Pablo Aguilar  and
Jesús Vázquez
Pablo Aguilar
Affiliation:
Banco de España, Université catholique de Louvain and Universidad del País Vasco (UPV/EHU)
Jesús Vázquez*
Affiliation:
Universidad del País Vasco (UPV/EHU)
*
Address correspondence to: Jesús Vázquez, Depto. FAE II, Facultad de Economía y Empresa, Av. Lehendakari Aguirre 83, 48015 Bilbao, Spain. e-mail: jesus.vazquez@ehu.es. Phone: (+34) 94 601 3779. Fax: (+34) 94 601 7123.
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Abstract

Agents can learn from financial markets to predict macroeconomic outcomes, and learning dynamics can feed back into both the macroeconomy and financial markets. This paper builds on the adaptive learning (AL) model of [Slobodyan, S. and R. Wouters (2012a) American Economic Journal: Macroeconomics 4, 65–101.] by introducing the term structure of interest rates. This extension enables term structure information to fully characterize agents’ expectations in real time. This feature addresses an imperfect information issue neglected in the related AL literature. The term structure of interest rates results in a strong channel of persistence driven by multi-period forecasting. Including the term structure in the AL model results in a model fit similar to that obtained in the rational expectation (RE) version of the model, but it greatly reduces the importance of other endogenous sources of aggregate persistence such as price and wage stickiness and the elasticity of the cost of adjusting capital. The model estimated also shows that term premium innovations are a major source of persistent fluctuations in nominal variables under AL. This stands in sharp contrast to the lack of transmission of term premium shocks to the macroeconomy under REs.

Keywords

Term structurereal-time adaptive learningmedium-scale DSGE model
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1635 - 1665
Copyright
© Cambridge University Press 2019

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Footnotes

We are very grateful to Raf Wouters for his close guidance on this work. We are also thankful for helpful comments from the Associate Editor, two anonymous referees, Elena Mattana, Alfonso Novales, Rigas Oikonomou, Luca Pensieroso, Sergey Slobodyan, participants at the 2016 European Summer Meetings of the Econometric Society (Geneva) and seminar participants at the University of Namur, the University of Navarra, the University of the Basque Country, the University of Salamanca, and the Public University of Navarra. Some of this research was supported by the Banco de España, the Spanish Government, and the Basque Government, under grant numbers ECO2013-43773P, ECO2016-78749-P, and IT-793-13.

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