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Misperceptions, heterogeneous expectations and macroeconomic dynamics

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  • Tim Taylor

    (Bank of England)

  • Richard Harrison

    (Bank of England)

Abstract

We explore the behaviour of our model when agents have access to two simple predictors, one of which is consistent with a mistaken belief that macroeconomic variables are more persistent. We show that the presence of a `persistent predictor' can lead to changes in beliefs which are self reinforcing, giving rise to endogenous fluctutions in the time series properties of the economy. Moreover, we show that such fluctuations arise even if we replace the `persistent predictor' with learning under constant gain.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 710.

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Date of creation: 2008
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Handle: RePEc:red:sed008:710

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  1. Branch, William A. & McGough, Bruce, 2009. "A New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(5), pages 1036-1051, May.
  2. Sargent, Thomas J., 1991. "Equilibrium with signal extraction from endogenous variables," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 15(2), pages 245-273, April.
  3. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 94(1), pages 190-217, March.
  4. Harrison, Richard & Taylor, Tim, 2012. "Non-rational expectations and the transmission mechanism," Bank of England working papers, Bank of England 448, Bank of England.
  5. Brock, W.A. & de Fontnouvelle, P., 1996. "Expectational Diversity in Monetary Economics," Working papers, Wisconsin Madison - Social Systems 9624, Wisconsin Madison - Social Systems.
  6. Brock, W.A., 1995. "A Rational Route to Randomness," Working papers, Wisconsin Madison - Social Systems 9530, Wisconsin Madison - Social Systems.
  7. Milani, Fabio, 2006. "A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous?," MPRA Paper 809, University Library of Munich, Germany.
  8. Carceles-Poveda, Eva & Giannitsarou, Chryssi, 2007. "Adaptive learning in practice," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(8), pages 2659-2697, August.
  9. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
  10. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 18(2), pages 203-20, April.
  11. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
  12. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2006. "The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model," Bank of England working papers, Bank of England 303, Bank of England.
  13. Fabio Milani, 2007. "Learning and Time-Varying Macroeconomic Volatility," Working Papers, University of California-Irvine, Department of Economics 070802, University of California-Irvine, Department of Economics.
  14. Nelson, Edward & Nikolov, Kalin, 2004. "Monetary Policy and Stagflation in the UK," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(3), pages 293-318, June.
  15. Thomas J. Sargent, 2008. "Evolution and Intelligent Design," American Economic Review, American Economic Association, American Economic Association, vol. 98(1), pages 5-37, March.
  16. Anufriev, M. & Hommes, C.H., 2007. "Evolution of Market Heuristics," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 07-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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Cited by:
  1. Harrison, Richard & Taylor, Tim, 2012. "Non-rational expectations and the transmission mechanism," Bank of England working papers, Bank of England 448, Bank of England.

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