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Behavioral Learning Equilibria

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  • Hommes, C.H.

    ()
    (University of Amsterdam)

  • Zhu, M.

    ()
    (University of Amsterdam)

Abstract

We propose behavioral learning equilibria as a plausible explanation of coordination of individual expectations and aggregate phenomena such as excess volatility in stock prices and high persistence in inflation. Boundedly rational agents use a simple univariate linear forecasting rule and correctly forecast the unconditional sample mean and first-order sample autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the structure of the economy. The simplicity of behavioral learning equilibria makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model with 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 co-exist, learning exhibits path dependence and inflation may switch between low and high persistence regimes.

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Bibliographic Info

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 12-09.

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Date of creation: 2012
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Handle: RePEc:ams:ndfwpp:12-09

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
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Web page: http://www.fee.uva.nl/cendef/
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Citations

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Cited by:
  1. 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.
  2. Cars Hommes, 2013. "Behaviorally Rational Expectations and Almost Self-Ful lling Equilibria," Tinbergen Institute Discussion Papers 13-204/II, Tinbergen Institute.
  3. Hommes, Cars H., 2014. "Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria," Review of Behavioral Economics, now publishers, now publishers, vol. 1(1-2), pages 75-97, January.
  4. Hommes, C.H., 2013. "Reflexivity, Expectations Feedback and Almost Self-fulfilling Equilibria: Economic Theory, Empirical Evidence and Laboratory Experiments," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 13-19, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  5. Dudek, Maciej K., 2014. "Living in an imaginary world that looks real," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 41(C), pages 209-223.

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