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Stability of Functional Rational Expectations Equilibria

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Author Info
David L. Kelly
Jamsheed Shorish () (Department of Economics, University of Aarhus, Denmark)

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Abstract

In this paper we examine a representative agent forecasting prices in a first-order self-referential overlapping generations model. We first consider intermediate stage learning, where agents update the forecasting rule every periods. We show that, in theory and simulations, the learning rule does not converge to the rational expectations equilibrium (REE). We next consider two stage learning, where agents learn the functional mapping between the current forecast function and the previous forecast function. We show that in theory and simulations the two stage learning rule converges to the REE.

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Publisher Info
Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 1999-5.

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Handle: RePEc:aah:aarhec:1999-5

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Related research
Keywords: Functional rational expectations; learning; overlapping generations;

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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  1. Shorish, Jamsheed, 2006. "Functional Rational Expectations Equilibria in Market Games," Economics Series 186, Institute for Advanced Studies. [Downloadable!]
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