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Rational thinking under costly information—Macroeconomic implications

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  • Gomes, Orlando

Abstract

The notion of optimized rational behavior in the formation of expectations is used in this note to study the dynamics of a simple macroeconomic model. In a setting where departures from stability are not possible under perfect foresight, the selection of an optimal degree of rationality may lead to the generation of long-term endogenous fluctuations.

Suggested Citation

  • Gomes, Orlando, 2012. "Rational thinking under costly information—Macroeconomic implications," Economics Letters, Elsevier, vol. 115(3), pages 427-430.
  • Handle: RePEc:eee:ecolet:v:115:y:2012:i:3:p:427-430 DOI: 10.1016/j.econlet.2011.12.102
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    References listed on IDEAS

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    1. Bullard James, 1994. "Learning Equilibria," Journal of Economic Theory, Elsevier, pages 468-485.
    2. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
    3. William Brock & Pietro Dindo & Cars Hommes, 2006. "Adaptive rational equilibrium with forward looking agents," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3-4), pages 241-278.
    4. Schonhofer, Martin, 1999. "Chaotic Learning Equilibria," Journal of Economic Theory, Elsevier, vol. 89(1), pages 1-20, November.
    5. Darby, Michael R, 1976. "Rational Expectations under Conditions of Costly Information," Journal of Finance, American Finance Association, vol. 31(3), pages 889-895, June.
    6. Dudek, Maciej K., 2010. "A consistent route to randomness," Journal of Economic Theory, Elsevier, vol. 145(1), pages 354-381, January.
    7. Orlando Gomes, 2010. "Ordinary Least Squares Learning And Nonlinearities In Macroeconomics," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 52-84, February.
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    Cited by:

    1. Orlando Gomes, 2015. "Sentiment Cyclicality," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 9(2), pages 104-134, December.

    More about this item

    Keywords

    Expectations; Information acquisition; Inflation dynamics; Rationality; Endogenous fluctuations; Stability;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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