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Behavioral learning equilibria

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Listed author(s):
  • Hommes, Cars
  • Zhu, Mei

Abstract

We propose behavioral learning equilibria, where boundedly rational agents learn to use a simple univariate linear forecasting rule with correctly specified unconditional mean and first-order autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the more complex structure of the economy. An important feature of behavioral learning equilibria is simplicity and parsimony, which makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model driven by AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria coexist, learning exhibits path dependence and inflation may switch between low and high persistence regimes.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053113001476
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 150 (2014)
Issue (Month): C ()
Pages: 778-814

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Handle: RePEc:eee:jetheo:v:150:y:2014:i:c:p:778-814
DOI: 10.1016/j.jet.2013.09.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

Keywords: Bounded rationality; Stochastic consistent expectations equilibrium; Adaptive learning; Excess volatility; Inflation persistence;

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Find related papers by JEL classification:
  • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
  • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
  • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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