Error learning behaviour and stability revisited

• DOI: 10.1016/j.jedc.2004.01.002
• Publication Date: 2004-04-09T09:21:41Z
• Authors: Domenico Colucci; Vincenzo Valori
• Keywords: Bounded rationality; Convergence to rational expectations; Learning dynamics; Adaptive expectations; Least squares learning; 0502 economics and business; 05 social sciences

Abstract We study the implications of error learning behaviour on the dynamic properties of stationary equilibria in an overlapping generations model under bounded rationality. We assume agents’ ability to learn from the past performance of their expectation formation mechanism, so that the mechanism itself is made endogenous. We define a class of learning rules under which this type of error learning behaviour enhances the stability properties of the economy. Also, we show that such set of error learning rules is not small in a topological sense. We give examples drawn from various contexts, and we show how the analysis carried out here relates to e.g. fading memory learning and recursive least squares.