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Large and uncertain heterogeneity of expectations: stability of equilibrium from a policy maker standpoint

Author

Listed:
  • Domenico Colucci

    (University of Florence)

  • Matteo Vigna

    (University of Florence)

  • Vincenzo Valori

    (University of Florence)

Abstract

We study the dynamic behavior of heterogeneous markets with many types of agents. In particular this paper aims at studying the effects of a change in the number n of agents, who are possibly different in terms of the rule they employ to forecast, on the long-run value of a relevant state variable. On the one hand we show that a heterogeneous agents model cannot be by and large traced back to an equivalent average representative-agent model. This complicates the possibility of easily reducing large and complex models to simpler and analytically tractable ones. On the other hand, under fairly general conditions, we characterize a class of models in which the probability of convergence to the steady state becomes either one or zero as n grows. This fact has positive implications for a policy maker committed to the goal of stabilizing the economy.

Suggested Citation

  • Domenico Colucci & Matteo Vigna & Vincenzo Valori, 2022. "Large and uncertain heterogeneity of expectations: stability of equilibrium from a policy maker standpoint," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(1), pages 319-348, January.
    • Handle: RePEc:spr:jeicoo:v:17:y:2022:i:1:d:10.1007_s11403-021-00335-4
    DOI: 10.1007/s11403-021-00335-4
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