Jc. Fuhrer et Ma. Hooker, LEARNING ABOUT MONETARY REGIME SHIFTS IN AN OVERLAPPING WAGE CONTRACT-MODEL, Journal of economic dynamics & control, 17(4), 1993, pp. 531-553
This paper uses stochastic simulations to explore the finite sample ef
fects of learning during the transition to convergence in an overlappi
ng wage contract economy. The model used is a variant of the Taylor (1
980) model that includes a reaction function for the monetary authorit
y. The contracting agents do not know the true parameters of the react
ion function, although they know the rest of the model structure and p
arameters. They update their estimates of the reaction function parame
ters with each observation and re-solve the model using rational expec
tations. We perform pseudo Monte Carlo simulations of this model, allo
wing for different classes of regime shifts and different learning mec
hanisms, and explore the rates of convergence of parameter estimates a
nd the effects on real and nominal variables.