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Calculation, Adaptation And Rational Expectations

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  • Evans, George W.
  • Ramey, Garey

Abstract

We propose an active cognition approach to bounded rationality, inwhich agents use a calculation algorithm to improve on the forecastsprovided by a purely adaptive learning rule such as least-squareslearning. Agents choices of calculation intensity depend on theirestimates of the benefits of improved forecasts relative tocalculation costs. Using an asset-pricing model, we show how morerapid adjustment to rational expectations and forward-lookingbehavior arise naturally when there are large anticipated structuralchanges such as policy shifts. We also give illustrative applicationsin which the severity of asset price bubbles and the intensity ofhyperinflationary episodes are related to the cognitive ability ofthe agents.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 2 (1998)
Issue (Month): 02 (June)
Pages: 156-182

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Handle: RePEc:cup:macdyn:v:2:y:1998:i:02:p:156-182_00

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Cited by:
  1. Jasmina Arifovic & Herbert Dawid & Christophe Deissenberg & Olena Kostyshyna, 2008. "Learning Benevolent Leadership in a Heterogenous Agents Economy," Working Papers halshs-00339761, HAL.
  2. Evans, G.W. & Honkapohja ,S. & Mitra, K., 2007. "Anticipated Fiscal Policy and Adaptive Learning," Cambridge Working Papers in Economics 0705, Faculty of Economics, University of Cambridge.
  3. Eran A. Guse, 2008. "Heterogeneous Expectations, Adaptive Learning, and Evolutionary Dynamics," Working Papers 09-01, Department of Economics, West Virginia University.
  4. Michael Woodford, 2001. "Fiscal Requirements for Price Stability," NBER Working Papers 8072, National Bureau of Economic Research, Inc.
  5. Albert Marcet & Juan P. Nicolini, 1995. "Recurrent hyperinflations and learning," Economics Working Papers 244, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2001.
  6. George W. Evans & Seppo Honkapohja, 2002. "Policy Interaction, Learning and the Fiscal Theory of Prices," University of Oregon Economics Department Working Papers 2002-17, University of Oregon Economics Department, revised 07 Jun 2007.
  7. Branch, William A., 2002. "Local convergence properties of a cobweb model with rationally heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 63-85, November.
  8. Branch, William A. & McGough, Bruce, 2008. "Replicator dynamics in a Cobweb model with rationally heterogeneous expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 65(2), pages 224-244, February.
  9. Domenico Colucci & V. Valori, 2001. "Error learning behaviour and stability revisited," CeNDEF Workshop Papers, January 2001 1A.1, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  10. Guse, Eran A., 2005. "Stability properties for learning with heterogeneous expectations and multiple equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1623-1642, October.

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