Learning the HardWay: Expectations and the U.S. Great Depression

We introduce adaptive learning – a parsimonious, convenient way to model uncertainty – in a dynamic general equilibrium model of the U.S. Great Depression. We show that even the smallest departure from rational expectations increases significantly the data mimicking ability of the model, in particul...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Aguilar, Pablo, Pensieroso, Luca
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2022
Subjects
Great Depression
United States > US
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Summary:We introduce adaptive learning – a parsimonious, convenient way to model uncertainty – in a dynamic general equilibrium model of the U.S. Great Depression. We show that even the smallest departure from rational expectations increases significantly the data mimicking ability of the model, in particular for what concerns the lack of recovery in detrended GDP after 1933. We conclude that in the case of big, traumatic events like the Great Depression, uncertainty is particularly unfavourable to the recovery phase.