Heterogeneous Beliefs and Instability
AbstractWhile Rational Expectations have dominated the paradigm of expectations formation, they have been more recently challenged on the empirical ground such as, for instance, in the dynamics of the exchange rate. This challenge has led to the introduction of heterogeneous expectations in economic modeling. More specifically, the forecasts of the market participants have been drawn from competing views. Two behaviours are usually considered: agents are either fundamentalist or chartist. Moreover, the possibility of switching from one behaviour to the other one is also assumed. In a simple cobweb model, we study the dynamics associated with Different endogenous switching process based on the path of prices. We provide an example with an asymmetric endogenous switching process built on the dynamics of past prices. This example confirms the widespread belief that fundamentalist market behaviour as compared with that of chartist tends to promote market stability.
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Bibliographic InfoPaper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 200111.
Date of creation: 15 Dec 2001
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Find related papers by JEL classification:
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
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