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How Do Experienced Traders Respond to Inflows of Inexperienced Traders? An Experimental Analysis

  • Eizo Akiyama

    ()

    (Faculty of Engineering, Information and Systems, University of Tsukuba)

  • Nobuyuki Hanaki

    ()

    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS, and IUF)

  • Ryuichiro Ishikawa

    ()

    (Faculty of Engineering, Information and Systems, University of Tsukuba)

This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their uncertain environment. When agents update their beliefs about the parameters that govern the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with actual leverage innovations observed over that period, the learning model predicts a sizeable recession in 2008-10, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the amplification due to learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks.Classification-JEL: C90, D84.

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Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1359.

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Length: 38 pages
Date of creation: 18 Dec 2013
Date of revision: 18 Dec 2013
Handle: RePEc:aim:wpaimx:1359
Contact details of provider: Web page: http://www.amse-aixmarseille.fr/en

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