Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations
AbstractWe examine the role of expectations in a model aimed to explain financial fluctuations. The model restates the core of Minsky's financial instability hypothesis, focusing on the role of expectations. The hypotheses concerning the process of formation and revision of expectations are discussed in light of Keynes's epistemological view of the behavior of boundedly rational agents under conditions of strong uncertainty. These hypotheses are formalized by drawing on recent advances in complex dynamics, decision theory and behavioral economics. We show that widespread use of extrapolative expectations by economic agents produces a high degree of financial instability that may lead to a serious financial crisis, and that the use by economic agents of a mix of extrapolative and regressive expectations reduces the dynamical instability of the model but may give rise to complex dynamics.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 83 (2012)
Issue (Month): 3 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jebo
Financial instability; Heterogeneous expectations; Extrapolative expectations; Regressive expectations; Complex dynamics;
Other versions of this item:
- Serena Sordi & Alessandro Vercelli, 2010. "Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 1010, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
- G01 - Financial Economics - - General - - - Financial Crises
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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.:
- Alessandro Vercelli, 2011. "A Perspective on Minsky Moments: Revisiting the Core of the Financial Instability Hypothesis," Review of Political Economy, Taylor & Francis Journals, vol. 23(1), pages 49-67.
- Day, Richard H. & Huang, Weihong, 1990.
"Bulls, bears and market sheep,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 14(3), pages 299-329, December.
- Frank H. Westerhoff, 2008. "Heuristic Expectation Formation And Business Cycles: A Simple Linear Model," Metroeconomica, Wiley Blackwell, vol. 59(1), pages 47-56, 02.
- Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series 231, Quantitative Finance Research Centre, University of Technology, Sydney.
- Sordi, Serena & Vercelli, Alessandro, 2006. "Financial fragility and economic fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 543-561, December.
- Westerhoff Frank H. & Reitz Stefan, 2003.
"Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists,"
Studies in Nonlinear Dynamics & Econometrics,
De Gruyter, vol. 7(4), pages 1-15, December.
- Reitz, Stefan & Westerhoff, Frank, 2003. "Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists," CFS Working Paper Series 2003/10, Center for Financial Studies (CFS).
- Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2005.
"Heterogeneous Expectations and Speculative Behaviour in a Dynamic Multi-Asset Framework,"
Research Paper Series
166, Quantitative Finance Research Centre, University of Technology, Sydney.
- Chiarella, Carl & Dieci, Roberto & He, Xue-Zhong, 2007. "Heterogeneous expectations and speculative behavior in a dynamic multi-asset framework," Journal of Economic Behavior & Organization, Elsevier, vol. 62(3), pages 408-427, March.
- Brock, W.A. & Hommes, C.H., 1996.
"Hetergeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model,"
9621, Wisconsin Madison - Social Systems.
- Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
- Sonnemans, J. & Hommes, C.H. & Tuinstra, J. & van de Velden, H., 1999.
"The Instability of a Heterogeneous Cobweb economy: a Strategy Experiment on Expectation Formation,"
CeNDEF Working Papers
99-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Sonnemans, Joep & Hommes, Cars & Tuinstra, Jan & van de Velden, Henk, 2004. "The instability of a heterogeneous cobweb economy: a strategy experiment on expectation formation," Journal of Economic Behavior & Organization, Elsevier, vol. 54(4), pages 453-481, August.
- Takatoshi Ito, 1988.
"Foreign Exchange Rate Expectations: Micro Survey Data,"
NBER Working Papers
2679, National Bureau of Economic Research, Inc.
- Ito, Takatoshi, 1990. "Foreign Exchange Rate Expectations: Micro Survey Data," American Economic Review, American Economic Association, vol. 80(3), pages 434-49, June.
- Lines, Marji & Westerhoff, Frank, 2010. "Inflation expectations and macroeconomic dynamics: The case of rational versus extrapolative expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 246-257, February.
- Levin, Jay H, 1997. "Chartists, Fundamentalists and Exchange Rate Dynamics," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(4), pages 281-90, October.
- Frank H. Westerhoff, 2006. "Business Cycles, Heuristic Expectation Formation, and Contracyclical Policies," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(5), pages 821-838, December.
- Vercelli, Alessandro, 2000. "Structural financial instability and cyclical fluctuations," Structural Change and Economic Dynamics, Elsevier, vol. 11(1-2), pages 139-156, July.
- Westerhoff Frank H., 2006. "Nonlinear Expectation Formation, Endogenous Business Cycles and Stylized Facts," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(4), pages 1-17, December.
- Frank Westerhoff, 2006. "Samuelson's multiplier-accelerator model revisited," Applied Economics Letters, Taylor & Francis Journals, vol. 13(2), pages 89-92.
- Shinji Takagi, 1991. "Exchange Rate Expectations: A Survey of Survey Studies," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 156-183, March.
- Giansante, Simone & Chiarella, Carl & Sordi, Serena & Vercelli, Alessandro, 2012. "Structural contagion and vulnerability to unexpected liquidity shortfalls," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 558-569.
- Passarella, Marco, 2011. "From the village fair to Wall Street. The Italian reception of Minsky’s economic thought," MPRA Paper 49593, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.