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Formation of Rationally Heterogeneous Expectations

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  • Pfajfar, D.

    (Tilburg University, Center for Economic Research)

Abstract

Abstract: This paper models expectation formation by taking into account that agents produce heterogeneous expectations due to model uncertainty, informational frictions and different capacities for processing information. We show that there are two general classes of steady states within this framework: those where strictly dominated forecasting rules vanish, and intrinsic heterogeneous steady states where a positive proportion of agents use a more costly perfect foresight. This demonstrates that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly, and do not exhibit identical performance in the long run.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2012-083.

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Date of creation: 2012
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Handle: RePEc:dgr:kubcen:2012083

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Web page: http://center.uvt.nl

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Keywords: Heterogeneous expectations; cobweb model; adaptive learning; rational expectations;

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References

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  38. Michael F. Bryan & Stefan Palmqvist, 2005. "Testing near-rationality using detailed survey data," Working Paper 0502, Federal Reserve Bank of Cleveland.
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Citations

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Cited by:
  1. Evans, George W & Honkapohja, Seppo, 2011. "Learning as a rational foundation for macroeconomics and finance," Research Discussion Papers 8/2011, Bank of Finland.
  2. Evans, George & Honkapohja, Seppo, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," SIRE Discussion Papers 2008-03, Scottish Institute for Research in Economics (SIRE).
  3. Pfajfar, D. & Santoro, E., 2008. "Asymmetries in Inflation Expectation Formation Across Demographic Groups," Cambridge Working Papers in Economics 0824, Faculty of Economics, University of Cambridge.
  4. Pfajfar, D. & Zakelj, B., 2011. "Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory (Replaces CentER DP 2009-007)," Discussion Paper 2011-091, Tilburg University, Center for Economic Research.

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