Learning, Adaptive Expectations, and Technology Shocks


Kevin X.D. Huang

Tao Zha

Download PDF
(655 KB)

2008-18 | September 1, 2008

This study explores the macroeconomic implications of adaptive expectations in a standard growth model. We show that the self-confirming equilibrium under adaptive expectations is the same as the steady state rational expectations equilibrium for all admissible parameter values, but that dynamics around the steady state are substantially different between the two equilibria. The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by escapes emphasized by Williams (2003). Consequently, adaptive expectations can be an important source of frictions that amplify and propagate technology shocks and seem promising for generating plausible labor market dynamics.

Article Citation

Huang, Kevin X.D., Tao Zha, and Zheng Liu. 2008. “Learning, Adaptive Expectations, and Technology Shocks,” Federal Reserve Bank of San Francisco Working Paper 2008-18. Available at https://doi.org/10.24148/wp2008-18

About the Author
Zheng Liu
Zheng Liu is a vice president and director of the Center for Pacific Basin Studies in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Zheng Liu