Learning benevolent leadership in a heterogenous agents economy
This paper studies the potential commitment value of cheap talk announcements in an agent-based dynamic extension of the Kydland-Prescott model. In every period, the policy maker makes a non-binding inflation announcement before setting the actual inflation rate. It updates its decisions using individual evolutionary learning. The private agents can choose between two different forecasting strategies: They can either set their forecast equal to the announcement or use an adaptive learning scheme to (potentially) forecast the true inflation. They switch between these two strategies as a function of information about the associated payoffs they obtain through word-of-mouth, choosing always the currently most favorable one. While all agents using the first strategy make the same forecast, those using the second strategy may generate different individual forecasts. In spite of the complexity of the environment, the boundedly rational policy maker learns to sustain a situation with a positive but fluctuating fraction of believers. This outcome is Pareto superior to the outcome predicted by standard theory. Interestingly enough, the actions taken by the policy maker undergo marked qualitative changes as a function of the prevailing heterogeneity among and learning characteristics of the private agents.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- William A. Brock & Cars H. Hommes, 1997.
"A Rational Route to Randomness,"
Econometric Society, vol. 65(5), pages 1059-1096, September.
- William Poole, 2002.
49, Federal Reserve Bank of St. Louis.
- George W. Evans & William A. Branch, 2005.
"Model Uncertainty and Endogenous Volatility,"
Computing in Economics and Finance 2005
33, Society for Computational Economics.
- Wiliam Branch & George W. Evans, 2005. "Model Uncertainty and Endogenous Volatility," University of Oregon Economics Department Working Papers 2005-21, University of Oregon Economics Department, revised 26 Oct 2006.
- Herbert Dawid, 2005. "Long horizon versus short horizon planning in dynamic optimization problems with incomplete information," Economic Theory, Springer, vol. 25(3), pages 575-597, 04.
- Kaushik Mitra & Seppo Honkapohja, 2004.
"Performance of Monetary Policy with Internal Central Bank Forecasting,"
Royal Holloway, University of London: Discussion Papers in Economics
04/18, Department of Economics, Royal Holloway University of London, revised Jul 2004.
- Honkapohja, Seppo & Mitra, Kaushik, 2005. "Performance of monetary policy with internal central bank forecasting," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 627-658, April.
- Honkapohja, Seppo & Mitra, Kaushik, 2002. "Performance of monetary policy with internal central bank forecasting," Working Paper Series 0127, European Central Bank.
- Honkapohja, Seppo & Mitra, Kaushik, 2002. "Performance of monetary policy with internal central bank forecasting," Research Discussion Papers 3/2002, Bank of Finland.
- In-Koo Cho & Noah Williams & Thomas J. Sargent, 2002.
"Escaping Nash Inflation,"
Review of Economic Studies,
Oxford University Press, vol. 69(1), pages 1-40.
- Seppo Honkapohja & Kaushik Mitra, 2002.
"Learning Stability in Economies with Heterogenous Agents,"
CESifo Working Paper Series
772, CESifo Group Munich.
- Seppo Honkapohja & Kaushik Mitra, 2006. "Learning Stability in Economies with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 284-309, April.
- Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
- Honkapohja, Seppo & Mitra, Kaushik, 2002. "Learning stability in economics with heterogeneous agents," Working Paper Series 0120, European Central Bank.
- Alex Cukierman, 1992.
"Central Bank Strategy, Credibility, and Independence: Theory and Evidence,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262031981, June.
- Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 10, December.
- Robert J. Barro & David B. Gordon, 1983.
"Rules, Discretion and Reputation in a Model of Monetary Policy,"
NBER Working Papers
1079, National Bureau of Economic Research, Inc.
- Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
- Branch, William A. & Evans, George W., 2006.
"Intrinsic heterogeneity in expectation formation,"
Journal of Economic Theory,
Elsevier, vol. 127(1), pages 264-295, March.
- George Evans & William Branch, 2003. "Intrinsic Heterogeneity in Expectation Formation," Computing in Economics and Finance 2003 312, Society for Computational Economics.
- 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.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
- Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
- Evans, George W. & Ramey, Garey, 1998. "Calculation, Adaptation And Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(02), pages 156-182, June.
- Brock, William A. & Hommes, Cars H., 1998.
"Heterogeneous beliefs and routes to chaos in a simple asset pricing model,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 22(8-9), pages 1235-1274, August.
- Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
- Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-24, March.
- Deissenberg, Christophe & Gonzalez, Francisco Alvarez, 2002.
"Cheating for the common good in a macroeconomic policy game,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 26(9-10), pages 1457-1479, August.
- Francisco Álvarez González & Christophe Deissenberg, 2001. "Cheating for the common good in a Macroeconomic policy game," Documentos de Trabajo del ICAE 0104, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
- Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
- Walsh, Carl E, 1999. "Announcements, Inflation Targeting and Central Bank Incentives," Economica, London School of Economics and Political Science, vol. 66(262), pages 255-69, May.
When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1768-1790. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.