Hello! Could you please clarify what is meant by state variables? Are these stock variables, or do they represent variables that capture adaptive expectations?
A state variable is everything that is predetermined at time t, i.e. cannot be chosen/altered once the exogenous shocks of period t have been realized. A typical example is capital, which is fully determined by yesterday’s investment decision.
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So, this doesn’t relate to adaptive expectations?
No. A state variable can be defined independently of any expectations formation mechanism. Of course, the concept of a state variable plays a crucial role in the learning literature.
State variables are sum of the purely predetermined variables and mixed variables.
Purely predetermined variables appear in the equations in time t and t-1
Mixed variables appear in the model equations in time t and t+1 and t-1
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