LEARNING ABOUT MONETARY REGIME SHIFTS IN AN OVERLAPPING WAGE CONTRACT-MODEL

This paper uses stochastic simulations to explore the finite sample effects of learning during the transition to convergence in an overlapping wage contract economy. The model used is a variant of the Taylor (1980) model that includes a reaction function for the monetary authority. The contracting agents do not know the true parameters of the reaction function, although they know the rest of the model structure and parameters. They update their estimates of the reaction function parameters with each observation and re-solve the model using rational expectations. We perform pseudo Monte Carlo simulations of this model, allowing for different classes of regime shifts and different learning mechanisms, and explore the rates of convergence of parameter estimates and the effects on real and nominal variables.