A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical"
Sources of Persistence Become Superfluous?
by Fabio Milani
University of California, Irvine
This paper estimates a monetary DSGE model with learning introduced from the
primitive assumptions. The model nests infinite-horizon learning and features,
such as habit formation in consumption and inflation indexation, that are
essential for the model fit under rational expectations. I estimate the DSGE
model by Bayesian methods, obtaining estimates of the main learning parameter,
the constant gain, jointly with the deep parameters of the economy. The results
show that relaxing the assumption of rational expectations in favor of learning
may render mechanical sources of persistence superfluous. In particular,
learning appears to be a crucial determinant of inflation inertia.
JEL Codes: C11, D84, E30, E50, E52.
(PDF, 20 pages 356 kb)