## Are Policy Variables Exogenous?: The Econometric Implications of Learning While Maximizing1. 1 Motivation and Definition of Topic To provide motivation and to help define the topic of this study, important links between specific areas of economic theory are first highlighted. (i) Learning and Rational Expectations Theory In a standard rational expectations setting, agents in equilibrium have all the information about the model that enables them to correctly forecast future payoff-relevant variables. What rational expectations theory in its standard form does not tell us is what happens outside a rational expectations equilibrium. Less than complete knowledge of the model is a possible way to represent a situation outside the rational expectations equilibrium. It is natural to assume that agents recognize error and optimally utilize all available external information to improve on their information level, i. e. learn. Based on the information acquired by learning they modify their behavior. Under certain conditions learning steers the economy to the rational expectations equilibrium (Spear (1989), Blume, Bray and Easley (1982), Townsend (1983». This literature shows that learning is a possible mechanism to acquire the necessary level of information that agents are assumed to possess in a rational expectations equilibrium and hence there is a clear link between rational expectations theory and the 2 theory of learning. This fact is also emphasized among others by Friedman (1975), Pesaran (1987) and DeCanio (1979). (ii) Rational Expectations and Econometrics The equilibrium consequences of the rational expectations hypothesis are discussed in a considerable body of literature - cf. |

### What people are saying - Write a review

We haven't found any reviews in the usual places.

### Contents

I1 Motivation and Definition of Topic | 1 |

12 Overview and Literature Survey | 5 |

II1 The Model Tax Rate Determination under Simultaneous Optimization and Learning | 16 |

II2 Optimality of Active Learning in General | 27 |

II3 Optimality of Active Learning in the Model | 30 |

II4 An Alternative Specification | 34 |

II5 Summary | 39 |

III Econometric Implications | 43 |

IV21 Results Passive Learning | 75 |

IV3 Active Learning | 88 |

IV31 Results Active Learning | 99 |

V Tests for Exogeneity VI Overview | 111 |

V2 Formulation of the Exogeneity Tests | 115 |

V3 Results of the Exogeneity Tests | 122 |

Summary Directions for Future Research VI1 Summary | 127 |

VI21 Time Deformation and Learning | 128 |

III2 Implications | 48 |

III21 The Impact of Learning on Weak Exogeneity | 49 |

III22 The Impact of Learning on Strong Exogeneity | 53 |

III23 The Impact of Learning on Super Exogeneity | 55 |

III24 Learning Induces Nonstationarity | 69 |

III3 Summary | 70 |

IV Simulation | 72 |

IV2 Passive Learning | 74 |

VI22 Incomplete Learning on the Long Run | 131 |

VI23 On Intertemporal Transfer of Resources | 132 |

APPENDIX A | 133 |

APPENDIX B | 139 |

APPENDIX C | 142 |

APPENDIX D | 147 |

Bibliography | 154 |

### Other editions - View all

### Common terms and phrases

active learning algorithm Appendix assumed assumption Bayesian updating behavior belief distribution chapter conditional model constraint control variable convex current beliefs defined denote Diffuse Prior discount factor dynamic objective function dynamic programming econometric model econometrician Economic endogenous Engle equation evolution of beliefs exogeneity of policy Exogeneity Test exogenous variables formulation future beliefs Geweke given Granger causality Graph Hence Hendry and Richard Hughes-Hallett implies information set initial precision Laffer curve lagged learning agent linear Lucas critique martingale maximizing mean beliefs noise term nondiffuse prior nonstationarity normal distribution null hypothesis observed obtained optimal control optimal tax rate parameters of interest passive learning path policy experiments policy variables policymaker probability density function probability distribution problem random variable rational expectations regime changes restrictions result revenue risk aversion rule serial correlation Sims specification Static Objective Function statistical strict exogeneity strong exogeneity super exogeneity unknown parameter utilized value function variance weak exogeneity