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Of all publications in the section: 6
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Article
Kolyuzhnov Dmitri, Bogomolova A., Slobodyan S. Journal of Economic Dynamics and Control. 2014. Vol. 38. No. 1. P. 161-183.

We extend a continuous-time approximation approach to the analysis of escape dynamics in economic models with constant gain adaptive learning. This approach is based on application of the results of continuous-time version of large deviations theory to the linear diffusion approximation of the original discrete-time dynamics under learning. We characterize escape dynamics by analytically deriving the most probable escape point and mean escape time. The approximation is tested on the Phelps problem of a government controlling inflation while adaptively learning a misspecified Phillips curve, studied previously by Sargent (1999) and Cho (2002) (henceforth, CWS), among others. We compare our results with simulations extended to very low values of the constant gain and show that, for the lowest gains, our approach approximates simulations relatively well. We express reservations regarding the applicability of any approach based on large deviations theory to characterization escape dynamics for economically plausible values of constant gain in the model of CWS when escapes are not rare. We show that for these values of the gain it is possible to derive first passage times for learning dynamics reduced to one dimension without resort to large deviations theory. This procedure delivers mean escape time results that fit the simulations closely. We explain inapplicability of large deviations theory by insufficient averaging near the point of self-confirming equilibrium for relatively large gains which makes escapes relatively frequent, suggest the changes which might help approaches based on the theory to work better in this gain interval, and describe a simple heuristic method of determining the range of constant gain values for which large deviations theory could be applicable.

Added: Nov 3, 2018
Article
Колюжнов Д. В., Богомолова А. С., Slobodyan S. Journal of Economic Dynamics and Control. 2014. Vol. 38. No. 1. P. 161-183.

We extend a continuous-time approximation approach to the analysis of escape dynamics in economic models with constant gain adaptive learning. This approach is based on the application of the results of continuous-time version of large deviations theory to the linear diffusion approximation of the original discrete-time dynamics under learning. We characterize escape dynamics by analytically deriving the most probable escape point and mean escape time. The approximation is tested on the Phelps problem of a government controlling inflation while adaptively learning a misspecified Phillips curve, studied previously by Sargent (1999) and Cho et al. (2002) (henceforth, CWS), among others. We compare our results with simulations extended to very low values of the constant gain and show that, for the lowest gains, our approach approximates simulations relatively well. We express reservations regarding the applicability of any approach based on large deviations theory to characterizing escape dynamics for economically plausible values of constant gain in the model of CWS when escapes are not rare. We show that for these values of the gain it is possible to derive first passage times for learning dynamics reduced to one dimension without resort to large deviations theory. This procedure delivers mean escape time results that fit the simulations closely. We explain inapplicability of large deviations theory by insufficient averaging near the point of self-confirming equilibrium for relatively large gains which makes escapes relatively frequent, suggest the changes which might help approaches based on the theory to work better in this gain interval, and describe a simple heuristic method for determining the range of constant gain values for which large deviations theory could be applicable. © 2013 Elsevier B.V.

Added: Mar 27, 2015
Article
Slobodyan S. Journal of Economic Dynamics and Control. 2005. Vol. 29. No. 1-2. P. 159-185.

We consider the effects of global sunspot fluctuations in a growth model with externalities, where the Pareto-inferior steady state (poverty trap) is indeterminate. A global (not restricted to a small neighborhood of the steady state) sunspot can move the economy from the poverty trap's region of attraction into the region of attraction of a Pareto-superior steady state, even if the sunspot variable is modeled as a continuous sample path Wiener process. Government can influence the probability of sunspot-induced escape from the trap by shifting the boundary between different regions of attraction through changes in the parameters of the tax regime. We also discuss the welfare consequences of these policy interventions.The model considered here belongs to a class of models, related to the model of Benhabib and Farmer (J. Econ. Theory 63(1) (1994) 19), which could be transformed into a two-dimensional system of Lotka–Volterra differential equations. This allows complete characterization of the global dynamics of the deterministic and stochastic versions of the model. In particular, in this class of models limit cycles do not exist, and exact regions of attraction of indeterminate steady states can be obtained. We study the stochastic stability of the poverty trap steady state subject to sunspot fluctuations, and demonstrate an approximate method of estimating escape probability as a function of initial conditions and the model's parameters.

Added: Nov 3, 2018
Article
Slobodyan S., Wouters R. Journal of Economic Dynamics and Control. 2012. Vol. 36. No. 1. P. 26-46.

We evaluate the empirical relevance of learning by private agents in an estimated medium-scale DSGE model. We replace the standard rational expectations assumption in the Smets and Wouters (2007) model by a constant-gain learning mechanism. If agents know the correct structure of the model and only learn about the parameters, both expectation mechanisms produce very similar results, and only the transition dynamics that are generated by specific initial beliefs seem to improve the fit. If, instead, agents use only a reduced information set in forming the perceived law of motion, the implied model dynamics change and, depending on the specification of the initial beliefs, the marginal likelihood of the model can improve significantly. These best-fitting models add additional persistence to the dynamics and this reduces the gap between the IRFs of the DSGE model and the more data-driven DSGE-VAR model.

Added: Nov 3, 2018
Article
McMahon M., Peiris U., Polemarchakis H. Journal of Economic Dynamics and Control. 2018. No. 93. P. 92-114.

Unconventional monetary policy, by relaxing restrictions on the composition of the balance sheet of the central bank, compromises control over the stochastic path of inflation; or, in open economies, over the stochastic path of exchange rates. If the composition of the balance sheet is unrestricted then the path of inflation is indeterminate. This is the case under pure quantitative easing, where the target is the size of real money balances. In contrast, credit easing policies restrict the composition of the portfolio by targeting a specific expansion in the maturity profile of bonds bought, and thus can implement a determinate path of inflation. The composition of the portfolios traded by monetary-fiscal authorities also determines premia in asset and currency markets.

Added: Jan 25, 2018
Article
Teteryatnikova M. Journal of Economic Dynamics and Control. 2014. Vol. 47. P. 186-210.

This paper studies the risk and potential impact of system-wide defaults in a tiered banking network, where a small group of head institutions has many credit linkages with other banks, while the majority of banks have only a few links. A network is random and displays a given distribution of the number of banks' linkages, known as degree. We model tiering by a negative correlation between degrees of neighboring banks and by a scale-free degree distribution. The main findings of the paper highlight the advantages of tiering. Both the risk of systemic crisis and the potential scope of the crisis are lower in systems with negative correlation of bank degrees than in other types of systems. Similarly, in scale-free networks, the resilience of the system to shocks is increasing with the level of tiering.

Added: Feb 3, 2018