Learning and the great moderation
By: by James B. Bullard and Aarti Singh
Contributors: Singh, Aarti; Federal Reserve Bank of St. Louis
Series: Working paper -- 2007-027A; Working paper (Federal Reserve Bank of St. Louis : Online) -- 2007-027A.
Publisher: Federal Reserve Bank of St. Louis
Published: 2007
Place of publication: St. Louis, Mo.]
Language: eng
Format: [electronic resource] /
Description: "We study a stylized theory of the volatility reduction in the U.S.  after 1984--the Great Moderation--which attributes part of the stabilization to less volatile shocks and another part to more difficult inference on the part of Bayesian households attempting to learn the latent state of the economy.  We use a standard equilibrium business cycle model with technology following an unobserved regime-switching process.  After 1984, according to Kim and Nelson (1999a), the variance of U.S.  macroeconomic aggregates declined because boom and recession regimes moved closer together, keeping conditional variance unchanged.  In our model this makes the signal extraction problem more difficult for Bayesian households, and in response they moderate their behavior, reinforcing the effect of the less volatile stochastic technology and contributing an extra measure of moderation to the economy.  We construct example economies in which this learning effect accounts for about 30 percent of a volatility reduction of the magnitude observed in the postwar U.S.  data"--Federal Reserve Bank of St. Louis web site.
Notes: Title from PDF file as viewed on 7/23/2007.

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