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Adaptive forecasts

Evans, George W. and Honkapohja, Seppo (1993) Adaptive forecasts. CEP discussion paper, 135. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Identification Number: 135

Abstract

Standard linear macroeconomic models generate business cycles around a unique equilibrium through random productivity or preference shocks. Dynamic nonlinear models with multiple equilibria have the potential for endogenous fluctuations without exogenous shocks. This paper combines both approaches in a nonlinear model with multiple steady states due to a production externality. In the absence of policy changes, the driving forces generating fluctuations are exogenous random productivity shocks: without these shocks the economy would converge to a nonstochastic steady state. However, because there are multiple steady states, large productivity shocks of the right sign can shift the economy between high and low level stochastic steady states, providing an additional endogenous source of fluctuations. In this setting macroeconomic policy exhibits hysteresis (irreversibilities), and policy can be used to eliminate endogenous fluctuations.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 1993 The Authors
Subjects: H Social Sciences > HB Economic Theory
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Series: Working Papers > CEP Discussion Papers
Date Deposited: 19 Aug 2008 15:52
Last Modified: 03 Mar 2013 10:28
URI: http://eprints.lse.ac.uk/id/eprint/20980

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