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Heterogeneous Expectations, Adaptive Learning, and Evolutionary Dynamics

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  • Eran A. Guse

    (Department of Economics, West Virginia University)

Abstract

This paper presents a linear self-referential macroeconomic model with the possibility of multiple equilibria where agents have the choice of using one of two forecasting models (one of minimum state variable form and the other of sunspot form) to form expectations of current and future prices. Endogenous predictor selection is modeled as an evolutionary game where individuals choose among the forecasting models based on relative performance. Some Nash solutions are not relevant as they are not stable under evolutionary or adaptive learning. Finally, it is shown that the sunspot equilibrium is fragile against temporary shocks to information costs.

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File URL: http://www.be.wvu.edu/div/econ//work/pdf_files/09-01.pdf
File Function: First version, November 2006
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Bibliographic Info

Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 09-01.

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Length: 30 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:wvu:wpaper:09-01

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Postal: P.O. Box 6025, Morgantown, WV 26506-6025
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Web page: http://www.be.wvu.edu/div/econ/
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Related research

Keywords: Adaptive Learning; Evolutionary Dynamics; Heterogeneous Expectations; Multiple Equilibria; Rational Expectations.;

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References

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  1. Hommes, Cars & Sorger, Gerhard, 1998. "Consistent Expectations Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 287-321, September.
  2. Thomas J. Sargent, 1973. "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 429-480.
  3. Guse, Eran A., 2008. "Learning in a misspecified multivariate self-referential linear stochastic model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1517-1542, May.
  4. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-85, September.
  5. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  7. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
  8. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  9. Heinemann, Maik, 2000. "Convergence Of Adaptive Learning And Expectational Stability: The Case Of Multiple Rational-Expectations Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 4(03), pages 263-288, September.
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  16. Bill Branch & George W. Evans, 2003. "Intrinsic Heterogeneity in Expectation Formation," University of Oregon Economics Department Working Papers 2003-32, University of Oregon Economics Department, revised 04 Oct 2004.
  17. Branch, William A. & McGough, Bruce, 2008. "Replicator dynamics in a Cobweb model with rationally heterogeneous expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 65(2), pages 224-244, February.
  18. Evans, George W. & McGough, Bruce, 2003. "Monetary policy, indeterminacy and learning," CFS Working Paper Series 2003/37, Center for Financial Studies (CFS).
  19. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  20. Sethi, Rajiv, 1996. "Endogenous regime switching in speculative markets," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 99-118, March.
  21. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
  22. Guse, Eran A., 2005. "Stability properties for learning with heterogeneous expectations and multiple equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1623-1642, October.
  23. Evans, George W. & Ramey, Garey, 1998. "Calculation, Adaptation And Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(02), pages 156-182, June.
  24. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-24, March.
  25. Bray, Margaret M & Savin, Nathan E, 1986. "Rational Expectations Equilibria, Learning, and Model Specification," Econometrica, Econometric Society, vol. 54(5), pages 1129-60, September.
  26. Evans, George W., 1989. "The fragility of sunspots and bubbles," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 297-317, March.
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Citations

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Cited by:
  1. Michele Berardi, 2008. "Fundamentalists vs. chartists: learning and predictor choice dynamics," Centre for Growth and Business Cycle Research Discussion Paper Series 104, Economics, The Univeristy of Manchester.
  2. Michele Berardi, 2013. "On the fragility of sunspot equilibria under learning and evolutionary dynamics," Centre for Growth and Business Cycle Research Discussion Paper Series 186, Economics, The Univeristy of Manchester.
  3. Guse, Eran A., 2014. "Adaptive learning, endogenous uncertainty, and asymmetric dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 355-373.
  4. Hommes, C.H., 2010. "The Heterogeneous Expectations Hypothesis: Some Evidence from the Lab," CeNDEF Working Papers 10-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  5. Michele Berardi, 2011. "Heterogeneous sunspots solutions under learning and replicator dynamics," Centre for Growth and Business Cycle Research Discussion Paper Series 160, Economics, The Univeristy of Manchester.
  6. Alberto Locarno, 2012. "Monetary policy in a model with misspecified, heterogeneous and ever-changing expectations," Temi di discussione (Economic working papers) 888, Bank of Italy, Economic Research and International Relations Area.
  7. Bofinger, Peter & Debes, Sebastian & Gareis, Johannes & Mayer, Eric, 2013. "Monetary policy transmission in a model with animal spirits and house price booms and busts," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2862-2881.
  8. Bovi, Maurizio, 2013. "Are the representative agent’s beliefs based on efficient econometric models?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 633-648.
  9. William R. Parke & George A. Waters, 2011. "On the Evolutionary Stability of Rational Expectations," Working Paper Series 20111002, Illinois State University, Department of Economics.
  10. Carravetta, Francesco & Sorge, Marco M., 2013. "Model reference adaptive expectations in Markov-switching economies," Economic Modelling, Elsevier, vol. 32(C), pages 551-559.
  11. Goldbaum, David & Panchenko, Valentyn, 2010. "Learning and adaptation's impact on market efficiency," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 635-653, December.

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