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Myopic households on a stable path: the neoclassical growth model with rule-based expectations

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  • Teglio, Andrea
  • Catalano, Michele
  • Petrovic, Marko

Abstract

The neoclassical growth model is extended to include limitations in the forecasting capability of a rational individual, who can predict the future state of the economy only for a short time horizon. Long-term predictions are formulated according to uninformed expectations, relying solely on myopic information about short-run dynamics, such as assuming a future persistent growth rate. Steady-state results are obtained in the case of iso-elastic utility and Cobb-Douglas technology. The model, characterized by forecasting errors and subsequent corrections, exhibits global stability and has relevant implications for welfare and policy. It is analyzed in comparison to the Solow–Swan model and the Ramsey model. Our approach, incorporating behavioral assumptions within a standard optimization rule, successfully yields explicit analytical solutions for the policy function in the neoclassical model. This strategy may also be extended to various modeling streams, including DSGE and HANK models.

Suggested Citation

  • Teglio, Andrea & Catalano, Michele & Petrovic, Marko, 2014. "Myopic households on a stable path: the neoclassical growth model with rule-based expectations," MPRA Paper 120253, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:120253
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    References listed on IDEAS

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    More about this item

    Keywords

    Expectations; Neoclassical growth; Bounded rationality; Myopic behavior; Dynamic optimization; Time inconsistency.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution

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