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Adaptive learning, endogenous uncertainty, and asymmetric dynamics

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  • Guse, Eran A.

Abstract

I present a simple model where forecasting confidence affects aggregate demand. It is shown that this model has similar stability properties, under statistical and evolutionary learning, as a model without a confidence affect. From this setup, I introduce “Expectational Business Cycles” where output fluctuates due to learning, heterogeneous forecasting models and random changes in the efficient forecasting model. Agents use one of two forecasting models to forecast future variables while heterogeneity is dictated via an evolutionary process. Increased uncertainty, due to a shock to the structure of the economy, may result in a sudden decrease in output. As agents learn the equilibrium, output slowly increases to its equilibrium value. Expectational business cycles tend to arrive faster, last longer and are more severe as agents possess less information.

Suggested Citation

  • Guse, Eran A., 2014. "Adaptive learning, endogenous uncertainty, and asymmetric dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 355-373.
  • Handle: RePEc:eee:dyncon:v:40:y:2014:i:c:p:355-373 DOI: 10.1016/j.jedc.2014.01.020
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    References listed on IDEAS

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    Cited by:

    1. Nakagawa, Ryuichi, 2015. "Learnability of an equilibrium with private information," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 58-74.
    2. Ikeda, Taro, 2014. "Asymmetric preferences in real-time learning and the Taylor rule," Economics Letters, Elsevier, vol. 124(3), pages 487-489.

    More about this item

    Keywords

    Adaptive learning; Aggregate fluctuations; Heterogeneous expectations; Imitation dynamics; Multiple equilibria; Rational expectations; Uncertainty;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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