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Learning Benevolent Leadership in a Heterogenous Agents Economy

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Author Info

  • Jasmina Arifovic

    ()
    (Department of economics - Simon Fraser University)

  • Herbert Dawid

    ()
    (Dept. of Business Administration - Bielefeld University)

  • Christophe Deissenberg

    ()
    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

  • Olena Kostyshyna

    ()
    (Portland State University - Portland State University)

Abstract

This paper studies the potential commitment value of cheap talkinflation announcements in an agent-based dynamic extension of theKydland-Prescott model. In every period, the policy maker makesa non-binding inflation announcement before setting the actualinflation rate. It updates its decisions using individual evolutionarylearning. The private agents can choose between two differentforecasting strategies: They can either set their forecast equal tothe announcement or compute it, at a cost, using an adaptive learningscheme. They switch between these two strategies as a function ofinformation about the associated payoffs they obtain throughword-of-mouth, choosing always the currently most favorable one.Weshow that the policy maker is able to sustain a situation with apositive but fluctuating fraction of believers. This equilibrium isPareto superior to the outcome predicted by standard theory. Theinfluence of changes in key parameters and the impact of transmissionof information among nonbelievers on the dynamics are studied.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00339761.

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Date of creation: 18 Nov 2008
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Handle: RePEc:hal:wpaper:halshs-00339761

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Related research

Keywords: time inconsistency; bounded rationality; forecast and agentheterogeneity; cheap talk; evolutionary learning;

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References

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  1. Cho, In-Koo & Sargent, Thomas J., 2000. "Escaping Nash inflation," Working Paper Series, European Central Bank 0023, European Central Bank.
  2. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, Econometric Society, vol. 65(5), pages 1059-1096, September.
  3. Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics, Department of Economics, Royal Holloway University of London 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  4. Walsh, Carl E, 1999. "Announcements, Inflation Targeting and Central Bank Incentives," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 66(262), pages 255-69, May.
  5. Brock, W.A. & Hommes, C.H., 1996. "Hetergeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model," Working papers, Wisconsin Madison - Social Systems 9621, Wisconsin Madison - Social Systems.
  6. Wiliam Branch & George W. Evans, 2005. "Model Uncertainty and Endogenous Volatility," University of Oregon Economics Department Working Papers, University of Oregon Economics Department 2005-21, University of Oregon Economics Department, revised 26 Oct 2006.
  7. Honkapohja, Seppo & Mitra, Kaushik, 2005. "Performance of monetary policy with internal central bank forecasting," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 29(4), pages 627-658, April.
  8. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, De Gruyter, vol. 3(4), pages 10, December.
  9. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 32-42, March.
  10. Herbert Dawid, 2005. "Long horizon versus short horizon planning in dynamic optimization problems with incomplete information," Economic Theory, Springer, Springer, vol. 25(3), pages 575-597, 04.
  11. George Evans & William Branch, 2003. "Intrinsic Heterogeneity in Expectation Formation," Computing in Economics and Finance 2003, Society for Computational Economics 312, Society for Computational Economics.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
  14. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(10), pages 3203-3227, October.
  15. William Poole, 2002. "Flation," Speech, Federal Reserve Bank of St. Louis 49, Federal Reserve Bank of St. Louis.
  16. Francisco Álvarez González & Christophe Deissenberg, 2001. "Cheating for the common good in a Macroeconomic policy game," Documentos de Trabajo del ICAE, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico 0104, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  17. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 53-84, December.
  18. Evans, George W. & Ramey, Garey, 1998. "Calculation, Adaptation And Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 2(02), pages 156-182, June.
  19. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 207-24, March.
  20. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
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Cited by:
  1. Mauro Napoletano & Jean-Luc Gaffard & Zakaria Babutsidze, 2012. "Agent Based Models A New Tool for Economic and Policy Analysis: A New Tool for Economic and Policy Analysis," Sciences Po publications 3, Sciences Po.
  2. Giorgio Fagiolo & Andrea Roventini, 2012. "Macroeconomic Policy in DSGE and Agent-Based Models," Revue de l'OFCE, Presses de Sciences-Po, Presses de Sciences-Po, vol. 0(5), pages 67-116.
  3. Jasmina ARIFOVIC & Murat YILDIZOGLU, 2014. "Learning the Ramsey outcome in a Kydland & Prescott economy," Cahiers du GREThA, Groupe de Recherche en Economie Théorique et Appliquée 2014-06, Groupe de Recherche en Economie Théorique et Appliquée.
  4. repec:spo:wpecon:info:hdl:2441/53r60a8s3kup1vc9l5643ehjk is not listed on IDEAS

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