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Parameter learning in production economies

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Article number103555
<mark>Journal publication date</mark>31/05/2024
<mark>Journal</mark>Journal of Monetary Economics
Publication StatusPublished
Early online date15/05/24
<mark>Original language</mark>English


We examine how parameter learning amplifies the impact of macroeconomic shocks on equity prices and quantities in a standard production economy where a representative agent has Epstein-Zin preferences. An investor observes technology shocks that follow a regime-switching process but does not know the underlying model parameters governing the short-term and long-run perspectives of economic growth. We show that rational belief updating endogenously generates long-run risks that help explain various asset pricing facts, most prominently, dividend yield variance decomposition. The asset pricing implications of endogenous long-run risks depend crucially on the introduction of a procyclical dividend process.