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Formation of rationally heterogeneous expectations

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  • Pfajfar, Damjan

Abstract

This paper models expectation formation by taking into account that agents may produce heterogeneous expectations because of informational frictions and differing levels of a capacity to process information. We show that there are two general classes of steady states within this framework: those where strictly dominated forecasting rules vanish, and those heterogeneous states where a positive proportion of agents uses a more costly perfect foresight. We demonstrate that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly and do not exhibit identical performance in the long run.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 8 ()
Pages: 1434-1452

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:8:p:1434-1452

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Heterogeneous expectations; Cobweb model; Adaptive learning; Rational expectations;

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References

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Citations

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Cited by:
  1. Evans, George & Honkapohja, Seppo, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," SIRE Discussion Papers 2008-03, Scottish Institute for Research in Economics (SIRE).
  2. Pfajfar, D. & Zakelj, B., 2011. "Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (Replaces CentER DP 2009-007)," Discussion Paper 2011-091, Tilburg University, Center for Economic Research.
  3. Evans, George W & Honkapohja, Seppo, 2011. "Learning as a rational foundation for macroeconomics and finance," Research Discussion Papers 8/2011, Bank of Finland.
  4. Pfajfar, D. & Santoro, E., 2008. "Asymmetries in Inflation Expectation Formation Across Demographic Groups," Cambridge Working Papers in Economics 0824, Faculty of Economics, University of Cambridge.

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