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Intrinsic Heterogeneity in Expectation Formation

Author

Listed:
  • Bill Branch

    (College of William and Mary)

  • George W. Evans

    () (University of Oregon Economics Department)

Abstract

We introduce the concept of a Misspecification Equilibrium to dynamic macroeconomics. Agents choose between a list of misspecified econometric models and base their selection on relative forecast performance. A Misspecification Equilibrium is an equilibrium stochastic process in which agents forecast optimally given their choices, with the forecasting model parameters and predictor proportions endogenously determined. For appropriate conditions on the exogenous driving process and the degree of feedback of expectations, the Misspecification Equilibrium will exhibit Intrinsic Heterogeneity. With Intrinsic Heterogeneity more than one misspecified model receives positive weight in the distribution of predictors across agents, even in the neoclassical limit in which only the most successful predictors are used.

Suggested Citation

  • Bill Branch & George W. Evans, 2003. "Intrinsic Heterogeneity in Expectation Formation," University of Oregon Economics Department Working Papers 2003-32, University of Oregon Economics Department, revised 04 Oct 2004.
  • Handle: RePEc:ore:uoecwp:2003-32
    as

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    File URL: http://economics.uoregon.edu/papers/UO-2003-32_Evans_Intrinsic.pdf
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    References listed on IDEAS

    as
    1. Brock,W.A. & Hommes,C.H., 2001. "Evolutionary dynamics in financial markets with many trader types," Working papers 7, Wisconsin Madison - Social Systems.
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    3. Brock, William A. & de Fontnouvelle, Patrick, 2000. "Expectational diversity in monetary economies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 725-759, June.
    4. Branch, William A., 2002. "Local convergence properties of a cobweb model with rationally heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 63-85, November.
    5. John Haltiwanger & Michael Waldman, 1989. "Limited Rationality and Strategic Complements: The Implications for Macroeconomics," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 463-483.
    6. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
    7. Evans, George W. & Honkapohja, Seppo & Marimon, Ramon, 2001. "Convergence In Monetary Inflation Models With Heterogeneous Learning Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 5(01), pages 1-31, February.
    8. 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.
    9. 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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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Cobweb model; heterogeneous beliefs; adaptive learning; rational expectations.;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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