BoE paper drops rational expectations to solve unemployment puzzles
Adaptive learning approach offers better fit with reality, authors find
The concept of rational expectations is widely seen as a useful tool in economics despite often being a poor representation of reality. Now a group of economists suggests the idea could be to blame for unemployment theory not fitting well with the data.
In a working paper published by the Bank of England today (December 9), Federico Di Pace, Kaushik Mitra and Shoujian Zhang reject the idea of perfectly rational agents in favour of an adaptive learning approach. Agents in their model have a set
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