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Paper by Dr. Mei Zhu Accepted by Journal of Economic Theory

2013-10-18Set

Recently, the paper titled "Behavioral Learning Equilibria" co-authored by IAR Associate Research Fellow Dr. Mei Zhu was accepted for publication by tier-1 Journal of Economic Theory.

In the paper, the authors propose behavioral learning equilibria, where boundedly rational agents learn to use a simple univariate linear forecasting rule with correctly specified unconditional mean and first-order autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the more complex structure of the economy. An important feature of behavioral learning equilibria is simplicity and parsimony, which makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model driven by AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria co-exist, learning exhibits path dependence and inflation may switch between low and high persistence regimes.