Adaptive Learning, Social Security Reform, and Policy Uncertainty

I develop an adaptive learning model to study the welfare effects of Social Security policy uncertainty in an aging economy. Agents combine full knowledge of the political process (which Social Security reforms are possible and when they could occur) with limited knowledge about the structure of the economy. The adaptive learning amplifies cyclical dynamics along the transition path to the new steady state. This magnifies the welfare effects of policy uncertainty, compared to a standard rational expectations model. The ex ante consumption equivalent variation that equates the expected utility of consumption (with policy uncertainty) to the utility of expected consumption (across the possible policies without uncertainty) ranges between -0.29% and 0.21% of lifetime consumption in the adaptive learning model compared to -0.012% to -0.018% in the standard model. The welfare cost to future generations is also larger in the adaptive learning model compared to the rational model.

Title	Adaptive Learning, Social Security Reform, and Policy Uncertainty
Creator	Cottle Hunt, Erin
Publisher	Journal of Money, Credit and Banking
Academic Department	Economics
Division	Social Sciences
Organization	Lafayette College
Date Issued	June 2021
Date Available	2023-06-01
Type	Article
Language	English
Keyword	policy uncertainty
	fiscal sustainability
	bounded rationality
	learning
	social security
Bibliographic Citation	Cottle Hunt, E. (2021 Jun) "Adaptive Learning, Social Security Reform, and Policy Uncertainty." Journal of Money, Credit and Banking 53 (4): 677-714.
Standard Identifier	DOI 10.1111/jmcb.12770
Standard Identifier	Handle 10385/vh53wx083
Related Resource	https://ezproxy.lafayette.edu/login?url=https://onlinelibrary.wiley.com/doi/10.1111/jmcb.12770
Permalink	http://hdl.handle.net/10385/vh53wx083
Rights Statement	In Copyright
Rights Holders	The Ohio State University