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Chaotic dynamics in an overlapping generations model with myopic and adaptive expectations

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  • Chen, Hung-Ju
  • Li, Ming-Chia
  • Lin, Yung-Ju

Abstract

In this paper, we study dynamic behavior of an overlapping generations model under three different expectations: perfect foresight, myopic expectations and adaptive expectations. We show that economic transition under myopic or adaptive expectations is very different from that under perfect foresight. When agents are perfectly foresighted, dynamics is simple, with a unique steady state that is globally attracting. However, cycles and chaotic motion can appear under myopic and adaptive expectations. We study the possibility of Li-Yorke chaos under myopic expectations and entropic chaos under adaptive expectations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 67 (2008)
Issue (Month): 1 (July)
Pages: 48-56

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Handle: RePEc:eee:jeborg:v:67:y:2008:i:1:p:48-56

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References

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  1. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151, December.
  2. Grandmont, Jean-Michel, 1994. "Expectations formation and stability of large socioeconomic systems," CEPREMAP Working Papers (Couverture Orange) 9424, CEPREMAP.
  3. Michel P. & de la Croix, D., 1999. "Myopic and Perfect Foresight in the OLG Model," G.R.E.Q.A.M. 99a35, Universite Aix-Marseille III.
  4. Galor, Oded & Ryder, Harl E., 1989. "Existence, uniqueness, and stability of equilibrium in an overlapping-generations model with productive capital," Journal of Economic Theory, Elsevier, vol. 49(2), pages 360-375, December.
  5. Hommes, Cars H., 1994. "Dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand," Journal of Economic Behavior & Organization, Elsevier, vol. 24(3), pages 315-335, August.
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  7. Carl Chiarella & Xue-Zhong He, 2001. "Dynamics of Beliefs and Learning Under aL Processes - The Heterogeneous Case," Research Paper Series 55, Quantitative Finance Research Centre, University of Technology, Sydney.
  8. Benhabib, Jess & Day, Richard H., 1982. "A characterization of erratic dynamics in, the overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 37-55, November.
  9. Chiarella, Carl, 1988. "The cobweb model: Its instability and the onset of chaos," Economic Modelling, Elsevier, vol. 5(4), pages 377-384, October.
  10. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  11. Ronald Wendner, 2003. "Existence, uniqueness, and stability of equilibrium in an OLG economy," Economic Theory, Springer, vol. 23(1), pages 165-174, December.
  12. Michele Longo & Vincenzo Valori, 2001. "Existence and stability of equilibria in OLG models under adaptive expectations," Working Papers - Mathematical Economics 2001-01, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
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Cited by:
  1. Gomes, Orlando, 2013. "Information stickiness on general equilibrium and endogenous cycles," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(4), pages 1-43.
  2. Fanti, Luciano & Gori, Luca, 2010. "Complex equilibrium dynamics in a simple OLG model of neoclassical growth with endogenous retirement age and public pensions," MPRA Paper 23694, University Library of Munich, Germany.
  3. Fanti, Luciano & Gori, Luca, 2011. "Public health spending, old-age productivity and economic growth: Chaotic cycles under perfect foresight," Journal of Economic Behavior & Organization, Elsevier, vol. 78(1), pages 137-151.
  4. Luciano Fanti & Luca Gori, 2012. "Public Expenditure on Health and Private Old-Age Insurance in an OLG Growth Model with Endogenous Fertility: Chaotic Dynamics Under Perfect Foresight," Computational Economics, Society for Computational Economics, vol. 40(4), pages 333-353, December.
  5. Luciano Fanti & Luca Gori, 2013. "Fertility-related pensions and cyclical instability," Journal of Population Economics, Springer, vol. 26(3), pages 1209-1232, July.

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