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Beyond Rational Expectations: The Effects Of Heuristic Switching In An Overlapping Generations Model

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  • Brecht Boone

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  • Ewoud Quaghebeur

Abstract

We explore the transitional dynamics in an Overlapping Generations framework with and without heuristic switching. Agents use simple heuristics to forecast the interest rate and the real wage. The fraction of agents using a specific heuristic depends on its relative forecasting performance. In the absence of heuristic switching, the results indicate that there is a lot of variation in the transitional dynamics over different parameter values and heuristics. They might even oscillate or diverge. Including heuristic switching has two advantages. First, it decreases the variation in the transitional dynamics significantly. Second, it has a stabilising effect on oscillating or diverging transitional dynamics.

Suggested Citation

  • Brecht Boone & Ewoud Quaghebeur, 2018. "Beyond Rational Expectations: The Effects Of Heuristic Switching In An Overlapping Generations Model," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 18/943, Ghent University, Faculty of Economics and Business Administration.
  • Handle: RePEc:rug:rugwps:18/943
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    References listed on IDEAS

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    More about this item

    Keywords

    Heuristic Switching; Heterogeneous Agents; Fiscal Policy; Transitional Dynamics; Overlapping Generations;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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