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Performance Of Rational And Boundedly Rational Agents In A Model With Persistent Exchange-Rate Volatility

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  • Arifovic, Jasmina

Abstract

The model is a two-country overlapping generations economy with boundedly rational agents who update their decision rules using a version of the stochastic replicator dynamic. The results show that stationary rational expectations equilibria of this model are unstable under this type of evolutionary adaptation. The paper also derives a two-period-ahead forecast of the values of average fractions of savings placed in each of the two currencies. This forecast is used in decisionmaking of a rational agent who has a full knowledge of the evolutionary economy. The performance of the rational agent is compared to the performance of boundedly rational agents, based on the average utility received over time. Results show that the difference between utilities earned by rational and boundedly rational agents is small. In addition, the average utility of the best-performing boundedly rational agents is higher than the average utility of the rational agents.

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Bibliographic Info

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

Volume (Year): 5 (2001)
Issue (Month): 02 (April)
Pages: 204-224

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Handle: RePEc:cup:macdyn:v:5:y:2001:i:02:p:204-224_01

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Cited by:
  1. Ryuichi YAMAMOTO, 2005. "Evolution with Individual and Social Learning in an Agent-Based Stock Market," Computing in Economics and Finance 2005 228, Society for Computational Economics.
  2. LeBaron, Blake, 2006. "Agent-based Computational Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 24, pages 1187-1233 Elsevier.

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