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On Learning Equilibria

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Author Info
Florian Wagener
Jan Tuinstra

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Abstract

We investigate an inflationary overlapping generations model where households predict future inflation rates by running a least squares regression of inflation rates or prices on their past levels. We critically examine the results on learning equilibria obtained by Bullard (1994) and Schönhofer (1999) in this framework. They show that an increase in the money growth rate may lead to limit cycles and endogenous business cycles. We suggest an alternative estimation procedure, that starts from the same perceived law of motion, but is more sensible from an econometrician's point of view. We prove that for this estimation procedure there is global convergence on the monetary steady for a large set of savings functions. We also study, in a heterogeneous agents framework, evolutionary competition between the two estimation procedures, where the fraction of the population using a certain estimation procedure is determined by its past average quadratic forecast error. Interestingly, the more sensible estimation procedure is not always able to drive out the other estimation procedure, and endogenous business cycles may still be observed in this heterogeneous world

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 217.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:217

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Related research
Keywords: overlapping generations; learning; endogenous business cycles; heterogeneous beliefs; evolutionary dynamics;

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Find related papers by JEL classification:
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  2. Cars Hommes & Gerhard Sorger, 1997. "Consistent Expectations Equilibria," Tinbergen Institute Discussion Papers 97-051/1, Tinbergen Institute.
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  3. Florian Wagener & Jan Tuinstra, 2004. "On Learning Equilibria," Computing in Economics and Finance 2004 217, Society for Computational Economics. [Downloadable!]
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  4. repec:cup:macdyn:v:2:y:1998:i:3:p:287-321 is not listed on IDEAS
  5. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  6. James Bullard, 1991. "Learning equilibria," Working Papers 1991-004, Federal Reserve Bank of St. Louis. [Downloadable!]
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  7. Tuinstra, Jan, 2003. "Beliefs equilibria in an overlapping generations model," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 145-164, February. [Downloadable!] (restricted)
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  8. Duffy John, 1994. "On Learning and the Nonuniqueness of Equilibrium in an Overlapping Generations Model with Fiat Money," Journal of Economic Theory, Elsevier, vol. 64(2), pages 541-553, December. [Downloadable!] (restricted)
  9. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September. [Downloadable!] (restricted)
  10. Jan Wenzelburger, 2000. "Convergence of Adaptive Learning Models of Pure Exchange," Econometric Society World Congress 2000 Contributed Papers 1070, Econometric Society. [Downloadable!]
  11. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August. [Downloadable!] (restricted)
  12. Sonnenschein, Hugo, 1973. "Do Walras' identity and continuity characterize the class of community excess demand functions?," Journal of Economic Theory, Elsevier, vol. 6(4), pages 345-354, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Orlando Gomes, 2004. "Volatility, Heterogeneous Agents and Chaos," GE, Growth, Math methods 0409010, EconWPA. [Downloadable!]
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  2. Orlando Gomes, 2004. "A Continuous-Time Asset Pricing Model with Boundedly Rational Heterogeneous Agents," Finance 0409055, EconWPA. [Downloadable!]
  3. Tuinstra, J. & Wagener, F.O.O., 2003. "On Learning Equilibria (Revised June 2003)," CeNDEF Working Papers 03-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  4. Hommes, C.H., 2007. "Bounded Rationality and Learning in Complex Markets," CeNDEF Working Papers 07-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  5. Orlando Gomes, 2004. "Heterogeneous Researchers in a Two-Sector Representative Consumer Economy," GE, Growth, Math methods 0409009, EconWPA. [Downloadable!]
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  6. Jan Tuinstra & Florian Wagener, 2007. "On learning equilibria," Economic Theory, Springer, vol. 30(3), pages 493-513, March. [Downloadable!] (restricted)
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  7. Mikhail Anufriev & Tiziana Assenza & Cars Hommes & Domenico Massaro, . "Interest Rate Rules and Macroeconomic Stability under Heterogeneous Expectations," Tinbergen Institute Discussion Papers 09-040/1, Tinbergen Institute. [Downloadable!]
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