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Learning Benevolent Leadership in a Heterogenous Agents Economy

  • Jasmina Arifovic

    ()

    (Department of economics - Simon Fraser University)

  • Herbert Dawid

    ()

    (Dept. of Business Administration - Bielefeld University)

  • Christophe Deissenberg

    ()

    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université Paul Cézanne - Aix-Marseille 3 - Université de la Méditerranée - Aix-Marseille 2 - EHESS - École des hautes études en sciences sociales - CNRS - AMU - Aix-Marseille Université)

  • Olena Kostyshyna

    ()

    (PSU - Portland State University [Portland])

This paper studies the potential commitment value of cheap talkinflation announcements in an agent-based dynamic extension of theKydland-Prescott model. In every period, the policy maker makesa non-binding inflation announcement before setting the actualinflation rate. It updates its decisions using individual evolutionarylearning. The private agents can choose between two differentforecasting strategies: They can either set their forecast equal tothe announcement or compute it, at a cost, using an adaptive learningscheme. They switch between these two strategies as a function ofinformation about the associated payoffs they obtain throughword-of-mouth, choosing always the currently most favorable one.Weshow that the policy maker is able to sustain a situation with apositive but fluctuating fraction of believers. This equilibrium isPareto superior to the outcome predicted by standard theory. Theinfluence of changes in key parameters and the impact of transmissionof information among nonbelievers on the dynamics are studied.

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Paper provided by HAL in its series Working Papers with number halshs-00339761.

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Date of creation: 18 Nov 2008
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Handle: RePEc:hal:wpaper:halshs-00339761
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  1. Honkapohja, Seppo & Mitra, Kaushik, 2005. "Performance of monetary policy with internal central bank forecasting," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 627-658, April.
  2. Kaushik Mitra & Seppo Honkapohja, 2004. "Learning Stability in Economies with Heterogenous Agents," Royal Holloway, University of London: Discussion Papers in Economics 04/17, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  3. Walsh, Carl E, 1999. "Announcements, Inflation Targeting and Central Bank Incentives," Economica, London School of Economics and Political Science, vol. 66(262), pages 255-69, May.
  4. Evans, George W. & Ramey, Garey, 1998. "Calculation, Adaptation And Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(02), pages 156-182, June.
  5. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  6. Branch, William A. & Evans, George W., 2006. "Intrinsic heterogeneity in expectation formation," Journal of Economic Theory, Elsevier, vol. 127(1), pages 264-295, March.
  7. Cho, In-Koo & Sargent, Thomas J., 2000. "Escaping Nash inflation," Working Paper Series 0023, European Central Bank.
  8. Wiliam Branch & George W. Evans, 2005. "Model Uncertainty and Endogenous Volatility," University of Oregon Economics Department Working Papers 2005-21, University of Oregon Economics Department, revised 26 Oct 2006.
  9. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
  10. William Poole, 2002. "Flation," Speech 49, Federal Reserve Bank of St. Louis.
    • William Poole & Robert H. Rasche, 2002. "Flation," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-6.
  11. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  12. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, June.
  13. Herbert Dawid, 2005. "Long horizon versus short horizon planning in dynamic optimization problems with incomplete information," Economic Theory, Springer, vol. 25(3), pages 575-597, 04.
  14. Francisco Álvarez González & Christophe Deissenberg, 2001. "Cheating for the common good in a Macroeconomic policy game," Documentos de Trabajo del ICAE 0104, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  15. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  16. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
  17. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
  18. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  19. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-24, March.
  20. Stein, Jeremy C, 1989. "Cheap Talk and the Fed: A Theory of Imprecise Policy Announcements," American Economic Review, American Economic Association, vol. 79(1), pages 32-42, March.
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