Stationarity of Econometric Learning with Bounded Memory and a Predicted State Variable

Paper number: 15/02

Paper date: February 2015

Year: 2015

Paper Category: Discussion Paper

Authors

Tatiana Damjanovic, ŠSarunas Girdenas and Keqing Liu

Abstract

In this paper, we consider a model where producers set their prices based on their prediction of the aggregated price level and an exogenous variable, which can be a demand or a cost-push shock. To form their expectations, they use OLS-type econometric learning with bounded memory. We show that the aggregated price follows the random coefficient autoregressive process and we prove that this process is covariance stationary.

Keywords: econometric learning, bounded memory, random coefficient autoregressive process, stationarity.

JEL classi…cation: C22, C53, C62, D83, E31

Stationarity of Econometric Learning with Bounded Memory and a Predicted State Variable Stationarity of Econometric Learning with Bounded Memory and a Predicted State Variable