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An Experimental Study on Expectations and Learning in Overlapping Generations Models

Author

Listed:
  • Heemeijer Peter

    (ABN AMRO Bank)

  • Hommes Cars

    (University of Amsterdam)

  • Sonnemans Joep

    (University of Amsterdam)

  • Tuinstra Jan

    (University of Amsterdam)

Abstract

A plethora of models of learning has been developed and studied in macro-economic models in recent years. In this paper we will try to discriminate between these learning models by running laboratory experiments with incentivized human subjects. Participants predict inflation rates for 50 successive periods in a standard overlapping generations model and are rewarded on the basis of their forecasting accuracy. The information set for each participant contains the past inflation rates and the participant's own past predictions which, in turn, determine the actual inflation rate. We consider two treatments, with a low and a high level of monetary growth, respectively. We find that the level of convergence to the monetary steady state is significantly lower and volatility of inflation rates higher in the second treatment. Constant gain learning algorithms, such as adaptive expectations with a low adjustment parameter, seem to provide a better description of the experimental data than decreasing gain algorithms, such as (ordinary) least squares learning. Moreover, many participants switch between prediction strategies during the experiment on the basis of poor performance of their initial prediction strategy.

Suggested Citation

  • Heemeijer Peter & Hommes Cars & Sonnemans Joep & Tuinstra Jan, 2012. "An Experimental Study on Expectations and Learning in Overlapping Generations Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-49, October.
  • Handle: RePEc:bpj:sndecm:v:16:y:2012:i:4:n:1
    DOI: 10.1515/1558-3708.1944
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    References listed on IDEAS

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    Cited by:

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    3. Boone, Brecht & Quaghebeur, Ewoud, 2018. "Beyond rational expectations: The effects of heuristic switching in an Overlapping Generations model," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 349-364.
    4. Arifovic, Jasmina & Hommes, Cars & Salle, Isabelle, 2019. "Learning to believe in simple equilibria in a complex OLG economy - evidence from the lab," Journal of Economic Theory, Elsevier, vol. 183(C), pages 106-182.

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