Learning the Hard Way: Expectations and the U.S. Great Depression

Aguilar Garcia, Pablo Alberto;Pensieroso, Luca
(2022) , 35 pages

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  • Aguilar Garcia, Pablo AlbertoBank of Spain and UCL
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  • Pensieroso, LucaUCLouvain
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Abstract
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.
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Aguilar Garcia, P. A., & Pensieroso, L. (2022). Learning the Hard Way: Expectations and the U.S. Great Depression (LIDAM Discussion Paper IRES/2022/04). https://hdl.handle.net/2078.5/109925