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Chaotic dynamics in an overlapping generations model with myopic and adaptive expectations

  • Chen, Hung-Ju
  • Li, Ming-Chia
  • Lin, Yung-Ju

In this paper, we study dynamic behavior of an overlapping generations model under three different expectations: perfect foresight, myopic expectations and adaptive expectations. We show that economic transition under myopic or adaptive expectations is very different from that under perfect foresight. When agents are perfectly foresighted, dynamics is simple, with a unique steady state that is globally attracting. However, cycles and chaotic motion can appear under myopic and adaptive expectations. We study the possibility of Li-Yorke chaos under myopic expectations and entropic chaos under adaptive expectations.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 67 (2008)
Issue (Month): 1 (July)
Pages: 48-56

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Handle: RePEc:eee:jeborg:v:67:y:2008:i:1:p:48-56
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Carl Chiarella & Xue-Zhong He, 2001. "Dynamics of Beliefs and Learning Under aL Processes - The Heterogeneous Case," Research Paper Series 55, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Jean-Michel Grandmont, 1997. "Expectations Formation and Stability of Large Socioeconomic Systems," Working Papers 97-27, Centre de Recherche en Economie et Statistique.
  3. Michel P. & de la Croix, D., 1999. "Myopic and Perfect Foresight in the OLG Model," G.R.E.Q.A.M. 99a35, Universite Aix-Marseille III.
  4. Hommes, Cars H., 1994. "Dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand," Journal of Economic Behavior & Organization, Elsevier, vol. 24(3), pages 315-335, August.
  5. Chiarella, Carl, 1988. "The cobweb model: Its instability and the onset of chaos," Economic Modelling, Elsevier, vol. 5(4), pages 377-384, October.
  6. Brock, W.A., 1995. "A Rational Route to Randomness," Working papers 9530, Wisconsin Madison - Social Systems.
  7. Ronald Wendner, 2003. "Existence, uniqueness, and stability of equilibrium in an OLG economy," Economic Theory, Springer, vol. 23(1), pages 165-174, December.
  8. Michele Longo & Vincenzo Valori, 2001. "Existence and stability of equilibria in OLG models under adaptive expectations," Working Papers - Mathematical Economics 2001-01, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  9. Galor, Oded & Ryder, Harl E., 1989. "Existence, uniqueness, and stability of equilibrium in an overlapping-generations model with productive capital," Journal of Economic Theory, Elsevier, vol. 49(2), pages 360-375, December.
  10. repec:cup:cbooks:9780521806428 is not listed on IDEAS
  11. Benhabib, Jess & Day, Richard H., 1982. "A characterization of erratic dynamics in, the overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 37-55, November.
  12. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
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