Heterogeneous Expectations, Volatility and Welfare
AbstractThis paper explores the extent to which the lack of rationality of economic agents has affected the economic fluctuations of the U.S. hog market. The dynamic model of this paper adopts the framework of conventional rational expectations models and nests heterogeneity in expectations in the framework. In particular, the model assumes two types of economic agents. One (rational agent) has rational expectations and the other (boundedly rational agent) has static expectations. A log-likelihood function is constructed based on the model and the fraction of boundedly rational agents is estimated by the function. Subsequently, simulation experiments are performed to investigate the extent to which the presence of boundedly rational economic agents has affected the volatility of the economic variables of the market. In particular, two sets of artificial data are generated by the model, one set with the estimated fraction of boundedly rational agents and the other with their zero fraction. Next, the standard deviations of the quantity and price variables are computed using the simulated data and then compared. The welfare quantified as consumer surplus minus production costs is measured and compared in the same way. Empirical test results indicate that the presence of boundedly rational economic agents has increased the price and quantity volatility by 14 and 25 percent respectively, in the U.S. hog market for the period from 1945 to 1990. However, welfare turns out to be rarely affected by their presence as far as rational economic agents dominate the market.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2000_01.
Length: 32 pages
Date of creation: Jun 2000
Date of revision:
Contact details of provider:
Postal: 777 Kokusai-cho, Minami Uonuma0-shi, Niigata 949-7277 JAPAN
Web page: http://www.iuj.ac.jp/research/
More information through EDIRC
Heterogeneous expectations; Bounded rationality; Optimal control problem; Economic fluctuations; Consumer surplus;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kazumi Imai, Office of Academic Affairs).
If references are entirely missing, you can add them using this form.