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5.1 Introduction 5.1 Introduction
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5.2 Macroeconomic Dynamics 5.2 Macroeconomic Dynamics
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5.2.1 Structural Equations 5.2.1 Structural Equations
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5.2.2 Perceived Law of Motion 5.2.2 Perceived Law of Motion
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Priors and Learning Priors and Learning
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Rational Expectations Rational Expectations
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Stochastic Endpoints and Learning Stochastic Endpoints and Learning
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The Term Structure of Interest Rates The Term Structure of Interest Rates
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The Term Structure of Inflation Expectations The Term Structure of Inflation Expectations
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5.2.3 Actual Law of Motion 5.2.3 Actual Law of Motion
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5.3 Estimation Methodology 5.3 Estimation Methodology
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5.3.1 Maximum Likelihood Estimation 5.3.1 Maximum Likelihood Estimation
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5.3.2 Estimated Versions of the Model 5.3.2 Estimated Versions of the Model
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5.4 Estimation Results 5.4 Estimation Results
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5.4.1 Data 5.4.1 Data
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5.4.2 Parameter Estimates 5.4.2 Parameter Estimates
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5.4.3 Comparing Learning and Rational Expectations Models 5.4.3 Comparing Learning and Rational Expectations Models
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Bayesian Information Criterion (BIC) and Likelihood Decomposition Bayesian Information Criterion (BIC) and Likelihood Decomposition
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Prediction Errors Prediction Errors
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5.4.4 Learning Dynamics, Inflation Expectations, and Bond Markets 5.4.4 Learning Dynamics, Inflation Expectations, and Bond Markets
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5.5 Conclusions 5.5 Conclusions
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Appendix ALM Dynamics Appendix ALM Dynamics
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References References
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Comment - Jordi Gali Comment - Jordi Gali
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A Simple Model of the Term Structure A Simple Model of the Term Structure
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An Empirical Puzzle An Empirical Puzzle
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A Proposed Solution: Endpoint Learning A Proposed Solution: Endpoint Learning
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Dewachter and Lyrio's Contribution Dewachter and Lyrio's Contribution
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Open Issues and Caveats Open Issues and Caveats
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Do We Need a Full-Fledged DSGE Model to Explain the Term Structure Dynamics? Do We Need a Full-Fledged DSGE Model to Explain the Term Structure Dynamics?
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A Strong Departure from Rational Expectations A Strong Departure from Rational Expectations
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Two Competing Models Two Competing Models
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Reference Reference
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Discussion Summary Discussion Summary
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5 Learning, Macroeconomic Dynamics, and the Term Structure of Interest Rates
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Published:October 2008
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Abstract
This chapter builds and estimates a macroeconomic model that includes learning. Learning was introduced in the model by assuming that agents do not believe in time-invariant inflation targets nor in constant equilibrium real rates. Given these priors, the optimal learning rule was derived in terms of a Kalman gain updating rule. The results show that including learning improves the fit of the model independently of the type of information included in the measurement equation. Although learning models improve on the rational expectations models, they are not fully satisfactory. Autocorrelation in the errors was found to be significant. Introducing learning in a standard New Keynesian model generated sufficiently volatile stochastic endpoints to fit the variation in long-maturity yields and in surveys of inflation expectations. The learning model, therefore, complements the current macrofinance literature linking macroeconomic and term structure dynamics.
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