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Expectations in an OG Economy

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  • Christian Ghiglino
  • François Duc

Abstract

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.

Suggested Citation

  • Christian Ghiglino & François Duc, 2004. "Expectations in an OG Economy," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 2004.10, Institut d'Economie et Econométrie, Université de Genève.
  • Handle: RePEc:gen:geneem:2004.10
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    References listed on IDEAS

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    1. 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.
    2. Kehoe, Timothy J. & Levine, David K., 1984. "Regularity in overlapping generations exchange economies," Journal of Mathematical Economics, Elsevier, vol. 13(1), pages 69-93, April.
    3. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-1011, Sept.-Oct.
    4. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
    5. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
    6. 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.
    7. Yves Balasko & Christine Lang, 1998. "Manifolds of golden rule and balanced steady state equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(2), pages 317-330.
    8. 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.
    9. 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.
    10. Grandmont, Jean-Michel & Laroque, Guy, 1986. "Stability of cycles and expectations," Journal of Economic Theory, Elsevier, vol. 40(1), pages 138-151, October.
    11. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-224, March.
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