Survey_Adam_2002b

Abstract

The paper uses a simple model of monopolistic competition with prices preset for one period where agents hold money due to a cash-in-advance cibstraint. The only deviation from a rational expectations approach consists of imposing that agents can choose between either of two forecasting models to predict future inflation rates and that they must learn the paramters of the forecast functions. The restriction on the forecast model is such that one of the forecast models can correspond to a rational expectations equilibrium once larning is complete. In the rational expectations equilibrium output and inflation are just white noise and real wages are fully pro-cyclical. The subsequent analysis is based on log quarterly U.S. GNP data (not seasonally adjusted, from Q1:1959 to Q3: 1999) at constant and current prices with quarterly inflation defined as the implicit GNP-deflator and transformed into yearly rates.