Description:

Ben Johannsen (FRB): "Speed of Learning and Policy Analysis" with Lawrence J. Christiano and Martin Eichenbaum

Abstract: Little is known about how much time it takes for a learning equilibrium to converge to a rational expectations equilibrium (REE). This paper investigates what features of an economy determine whether convergence is fast or slow. In all of the models that we consider, people's beliefs about model outcomes are central determinants of those outcomes. We argue that under certain circumstances, convergence of a learning equilibrium to the REE can be so slow that policy analysis based on rational expectations is very misleading. We also develop new analytic results regarding rates of convergence in learning models.