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Multiple Equilibria in Heterogeneous Expectations Models

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Author Info
William Branch (College of William and Mary)
Bruce McGough (Oregon State University)

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Abstract

This paper fills an important gap in the literature on determinacy and existence of sunspot equilibria in stochastic linear self-referential models. The results in this paper demonstrate that heterogeneity in expectations may alter a model's regions of determinacy. We show how to associate with a heterogeneous expectations model (HE-model) a rational expectations model (ARE-model), the solutions to which are the equilibria of the HE-model. This association recasts the analysis of determinacy in the HE-model to analysis of determinacy in the ARE-model. We proceed to study a forward looking model and find that the stability properties of rational expectations models may not be robust. In particular, we present new results showing that in some models even a very small fraction of non-rational agents may preclude rational agents from coordinating on sunspots. Also, we present parameterizations of the model in which sunspots exist in the heterogeneous model when they do not exist in the rational expectations version of the model.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Contributions to Macroeconomics.

Volume (Year): 4 (2004)
Issue (Month): 1 ()
Pages: 1197-1197
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Handle: RePEc:bep:maccon:v:4:y:2004:i:1:p:1197-1197

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Related research
Keywords: Heterogeneous Beliefs Adaptive Expectations Rational Expectations Sunspot Equilibria

Find related papers by JEL classification:
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Michael F. Bryan & Guhan Venkatu, 2001. "The demographics of inflation opinion surveys," Economic Commentary, Federal Reserve Bank of Cleveland, issue Oct 15. [Downloadable!]
  2. Michael F. Bryan & Guhan Venkatu, 2001. "The curiously different inflation perspectives of men and women," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov. [Downloadable!]
  3. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  4. Anderlini, Luca & Canning, David, 2001. "Structural Stability Implies Robustness to Bounded Rationality," Journal of Economic Theory, Elsevier, vol. 101(2), pages 395-422, December. [Downloadable!] (restricted)
  5. Preston, Bruce, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," MPRA Paper 830, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  6. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  7. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
  8. Stéphane Gauthier, 2004. "Small departures from rationality magnify fluctuations," Economics Bulletin, Economics Bulletin, vol. 5(5), pages 1-5. [Downloadable!]
  9. George W. Evans & Seppo Honkapohja, 2002. "Expectational Stability of Stationary Sunspot Equilibria in a Forward-looking Linear Model," University of Oregon Economics Department Working Papers 2001-9, University of Oregon Economics Department, revised 14 Jan 2002. [Downloadable!]
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  10. William A. Branch, 2004. "The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations," Economic Journal, Royal Economic Society, vol. 114(497), pages 592-621, 07. [Downloadable!] (restricted)
  11. Bill Branch & George W. Evans, 2003. "Intrinsic Heterogeneity in Expectation Formation," University of Oregon Economics Department Working Papers 2003-32, University of Oregon Economics Department, revised 04 Oct 2004. [Downloadable!]
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  12. Gauthier, S., 1999. "Determinacy and Stability Under Learning of Rational Expectations Equilibria," G.R.E.Q.A.M. 99a46, Universite Aix-Marseille III.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Orlando Gomes, . "Volatility, Heterogeneous Agents and Chaos," The Electronic Journal of Evolutionary Modeling and Economic Dynamics, IFReDE - Université Montesquieu Bordeaux IV. [Downloadable!]
    Other versions:
  2. Guse, E., 2005. "Learning with Heterogeneous Expectations in an Evolutionary World," Cambridge Working Papers in Economics 0547, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  3. Michele Berardi, 2006. "Monetary policy with heterogeneous and misspecified expectations," Centre for Growth and Business Cycle Research Discussion Paper Series 81, Economics, The Univeristy of Manchester. [Downloadable!]
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This page was last updated on 2008-11-13.

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