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Behavioral learning equilibria

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  • Hommes, Cars
  • Zhu, Mei

Abstract

We propose behavioral learning equilibria, where boundedly rational agents learn to use a simple univariate linear forecasting rule with correctly specified unconditional mean and first-order autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the more complex structure of the economy. An important feature of behavioral learning equilibria is simplicity and parsimony, which makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model driven by AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria coexist, learning exhibits path dependence and inflation may switch between low and high persistence regimes.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 150 (2014)
Issue (Month): C ()
Pages: 778-814

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Handle: RePEc:eee:jetheo:v:150:y:2014:i:c:p:778-814

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Bounded rationality; Stochastic consistent expectations equilibrium; Adaptive learning; Excess volatility; Inflation persistence;

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Cited by:
  1. Dudek, Maciej K., 2014. "Living in an imaginary world that looks real," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 209-223.
  2. Hommes, C.H., 2013. "Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria," CeNDEF Working Papers 13-17, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Cars Hommes, 2013. "Reflexivity, Expectations Feedback and almost Self-fulfilling Equilibria: Economic Theory, Empirical Evidence and Laboratory Experiments," Tinbergen Institute Discussion Papers 13-206/II, Tinbergen Institute.
  4. Cars Hommes, 2013. "Reflexivity, expectations feedback and almost self-fulfilling equilibria: economic theory, empirical evidence and laboratory experiments," Journal of Economic Methodology, Taylor & Francis Journals, vol. 20(4), pages 406-419, December.
  5. Cars Hommes, 2013. "Behaviorally Rational Expectations and Almost Self-Ful lling Equilibria," Tinbergen Institute Discussion Papers 13-204/II, Tinbergen Institute.

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