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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.

Suggested Citation

  • Tim Taylor & Richard Harrison, 2008. "Misperceptions, heterogeneous expectations and macroeconomic dynamics," 2008 Meeting Papers 710, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:710
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    Cited by:

    1. Harrison, Richard & Taylor, Tim, 2012. "Non-rational expectations and the transmission mechanism," Bank of England working papers 448, Bank of England.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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