Expectations formation and stability of large socioeconomic systems
This paper attempts to identify some of the basic reasons why adaptive learning may or may not lead to stability and convergence to self-fulfilling expectations. It is shown that, if agents are somewhat uncertain about the local stability of the system, the learning dynamics is locally divergent. On the other hand, if agents are fairly sure of the local stability of the system, one may indeed get local stability. This 'uncertainty principle' does show up in a wide variety of contexts.
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