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Expectations, Forecasting, And Perfect Foresight

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  • Böhm, Volker
  • Wenzelburger, Jan

Abstract

The paper studies the nature of expectations formation rules for deterministic economic laws with an expectations feedback within the framework of dynamical systems theory. In such systems, the expectations formation rules, called predictors, have a dominant influence. The concept of a perfect predictor, which generates perfect-foresight orbits, is proposed and analyzed. Necessary and sufficient conditions are given for which local as well as global perfect foresight is possible. The concept is illustrated for the general linear model as well as for models of the cobweb type. For the standard overlapping generations model of economic growth, the existence of perfect predictions depends strongly on the savings behavior of the agents and on the technology.

Suggested Citation

  • Böhm, Volker & Wenzelburger, Jan, 1999. "Expectations, Forecasting, And Perfect Foresight," Macroeconomic Dynamics, Cambridge University Press, vol. 3(2), pages 167-186, June.
    • Handle: RePEc:cup:macdyn:v:3:y:1999:i:02:p:167-186_01
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    Cited by:

    1. Damdinsuren, Erdenebulgan & Zaharieva, Anna, 2023. "Expectation formation and learning in the labour market with on-the-job search and Nash bargaining," Labour Economics, Elsevier, vol. 81(C).
    2. Cars H. Hommes, 2009. "Bounded Rationality and Learning in Complex Markets," Chapters, in: J. Barkley Rosser Jr. (ed.), Handbook of Research on Complexity, chapter 5, Edward Elgar Publishing.
    3. Bohm, Volker & Wenzelburger, Jan, 2005. "On the performance of efficient portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 721-740, April.
    4. Cellarier, Laurent L., 2013. "A family production overlapping generations economy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2168-2179.
    5. Hommes, C.H., 1999. "Cobweb Dynamics under Bounded Rationality," CeNDEF Working Papers 99-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    6. Böhm, Volker & Wenzelburger, Jan, 2002. "Perfect Predictions In Economic Dynamical Systems With Random Perturbations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(5), pages 687-712, November.
    7. Schonhofer, Martin, 2001. "Can agents learn their way out of chaos?," Journal of Economic Behavior & Organization, Elsevier, vol. 44(1), pages 71-83, January.
    8. Augeraud-Veron E. & Augier L., 2001. "Stabilizing Endogenous Fluctuations with Fiscal Policies: Global Analysis on Piecewise Continuous Dynamical Systems," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 5(1), pages 1-18, April.
    9. Volker Böhm & Carl Chiarella, 2005. "Mean Variance Preferences, Expectations Formation, And The Dynamics Of Random Asset Prices," Mathematical Finance, Wiley Blackwell, vol. 15(1), pages 61-97, January.
    10. Böhm, Volker, 2014. "Rational Expectations and the Stability of Balanced Monetary Development," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100423, Verein für Socialpolitik / German Economic Association.
    11. Cavalli, F. & Chen, H.-J. & Li, M.-C. & Naimzada, A. & Pecora, N., 2023. "Heterogeneous expectations and equilibria selection in an evolutionary overlapping generations model," Journal of Mathematical Economics, Elsevier, vol. 104(C).
    12. Anton Koshelev, 2021. "FX Market Volatility," Papers 2104.14190, arXiv.org.
    13. Marten Hillebrand, 2008. "Pension Systems, Demographic Change, and the Stock Market," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-540-77972-8, December.
    14. Böhm, Volker, 2018. "The Dynamics of Balanced Expansion in Monetary Economies with Sovereign Debt," Center for Mathematical Economics Working Papers 602, Center for Mathematical Economics, Bielefeld University.
    15. Böhm, Volker, 2015. "The El Farol problem revisited," Center for Mathematical Economics Working Papers 536, Center for Mathematical Economics, Bielefeld University.
    16. Böhm, Volker, 2015. "The El Farol Problem Revisited," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112966, Verein für Socialpolitik / German Economic Association.
    17. Wenzelburger, Jan, 2006. "Learning in linear models with expectational leads," Journal of Mathematical Economics, Elsevier, vol. 42(7-8), pages 854-884, November.
    18. Wenzelburger, Jan, 2004. "Learning to predict rationally when beliefs are heterogeneous," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 2075-2104, September.

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