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Asset Prices and Macro Policy when Agents Learn

Objective

"A conventional assumption in dynamic models is that agents form their expectations in a very sophisticated manner. In particular, that they have Rational Expectations (RE). We develop some tools to relax this assumption while retaining fully optimal behaviour by agents. We study implications for asset pricing and macro policy.
We assume that agents have a consistent set of beliefs that is close, but not equal, to RE. Agents are ""Internally Rational"", that is, they behave rationally given their system of beliefs. Thus, it is conceptually a small deviation from RE. It provides microfoundations for models of adaptive learning, since the learning algorithm is determined by agents’ optimal behaviour. In previous work we have shown that this framework can match stock price and housing price fluctuations, and that policy implications are quite different.
In this project we intend to: i) develop further the foundations of internally rational (IR) learning, ii) apply this to explain observed asset price price behavior, such as stock prices, bond prices, inflation, commodity derivatives, and exchange rates, iii) extend the IR framework to the case when agents entertain various models, iv) optimal policy under IR learning and under private information when some hidden shocks are not revealed ex-post. Along the way we will address policy issues such as: effects of creating derivative markets, sovereign spread as a signal of sovereign default risk, tests of fiscal sustainability, fiscal policy when agents learn, monetary policy (more specifically, QE measures and interest rate policy), and the role of credibility in macro policy."

Call for proposal

ERC-2012-ADG_20120411
See other projects for this call

Funding Scheme

ERC-AG - ERC Advanced Grant

Host institution

FUNDACIÓ MARKETS, ORGANIZATIONS AND VOTES IN ECONOMICS
Address
Campus De Bellaterra De La Universidad Autonoma De Barcelona Sn Edificio B
08193 Cerdanyola Del Vallès
Spain
Activity type
Research Organisations
EU contribution
€ 1 731 645,83
Principal investigator
Albert Marcet Torrens (Prof.)
Administrative Contact
Marta Vallejo Tey (Ms.)

Beneficiaries (2)

CONSORCI MARKESTS_ORGANIZATIONS AND VOTES IN ECONOMICS

Participation ended

Spain
EU contribution
€ 238 614,17
Address
Facultat Economia- Edifici B - Campus De Bellaterra Uab
08193 Cerdanyola Del Valles
Activity type
Research Organisations
Administrative Contact
Salvador Barberà (Prof.)
FUNDACIÓ MARKETS, ORGANIZATIONS AND VOTES IN ECONOMICS
Spain
EU contribution
€ 1 731 645,83
Address
Campus De Bellaterra De La Universidad Autonoma De Barcelona Sn Edificio B
08193 Cerdanyola Del Vallès
Activity type
Research Organisations
Principal investigator
Albert Marcet Torrens (Prof.)
Administrative Contact
Marta Vallejo Tey (Ms.)