Theories of learning and economic policy

Abstract

The benchmark rational expectations (RE) assumption both assumes an unrealistic degree of rationality for economic agents and fails to address how agents would come to coordinate on an equilibrium. This essay reviews how theories of learning, and more specifically adaptive learning, address these issues and can lead to policy conclusions distinct from those obtained under RE. Applications discussed include monetary policy in New Keynesian models, the neo-Fisherian policy view, inflation targets, hyperinflation models, and macroeconomic policy to avoid stagnation at the zero lower bound.