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Expectations in an OG Economy

  • Christian Ghiglino
  • François Duc

Dynamic economic models usually describe the path of economic variables as prices, consumption or capital at equilibrium. The most popular models assume that agents have perfect foresight. Implicitly this assumption requires that agents can compute the complete infinite path, an exercise that requires to solve a system of equations involving an infinite num- ber of equations and unknowns. Equivalently, one could assume that there is a well behaved and fast mechanism driving the economy to the temporary equilibrium. A major difficulty is that the behavior of the consumers in any given period depends on the present and all the fu- ture prices. In the paper, we consider an overlapping generation model in which the consumers form expectations using truncated versions of the model. The mechanism of price adjustment may then be analyzed. Both the expectational dynamics, as treated in Balasko (1994), and the Wal- ras’s tatonnement, as in Hens (1997), are considered. Sufficient conditions for stability of the perfect foresight equilibrium within these price forma- tion mechanisms are derived. We also discuss the issue of the robustness of the results to parameters used in the truncation.

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Paper provided by Institut d'Economie et Econométrie, Université de Genève in its series Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva with number 2004.10.

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Length: 21 pages
Date of creation: Aug 2004
Date of revision:
Handle: RePEc:gen:geneem:2004.10
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  1. Ghiglino, Christian & Tvede, Mich, 1995. "Endowments, stability, and fluctuations in OG models," Journal of Economic Dynamics and Control, Elsevier, vol. 19(3), pages 621-653, April.
  2. Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
  3. Hens, Thorsten, 1997. "Stability of tatonnement processes of short period equilibria with rational expectations," Journal of Mathematical Economics, Elsevier, vol. 28(1), pages 41-67, August.
  4. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  5. Timothy Kehoe, 1982. "Regularity in Overlapping Generations Exchange Economies," UCLA Economics Working Papers 258, UCLA Department of Economics.
  6. Yves Balasko & Christine Lang, 1998. "Manifolds of golden rule and balanced steady state equilibria," Economic Theory, Springer, vol. 11(2), pages 317-330.
  7. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  8. Grandmont Jean-michel & Laroque Guy, 1985. "Stability of cycles and expectations," CEPREMAP Working Papers (Couverture Orange) 8519, CEPREMAP.
  9. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct.
  10. Balasko, Yves & Royer, Daniel, 1996. "Stability of Competitive Equilibrium with Respect to Recursive and Learning Processes," Journal of Economic Theory, Elsevier, vol. 68(2), pages 319-348, February.
  11. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-24, March.
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