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Interactive Learning and Behavioral Sunspots

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  • Gaetano Gaballo

    ()

Abstract

This paper shows how to extend the adaptive learning approach to a truly behavioral uncertainty problem. It investigates the simplest case of a first order self-referential model where two agents have a non-negligible impact on aggregate expectations. Unlike the standard setting, agents are not boundedly rational in that they acknowledge their own influence on output and they are perfectly informed about the exogenous determinants of the economy. Nevertheless no common knowledge is assumed; agents are epistemically isolated and they can only have noisy perceptions of the other agent's simultaneous expectation. In order to have consistent forecasts, each agent has to learn how the other agent's expectations will affect the economy. I prove there exist two types of learnable equilibria: (a) a unique rational expectation equilibrium (REE) and (b) at least one behavioral sunspot equilibrium (BSE). The latter may arise because the learning dynamics can generate the self-fulfilling reciprocal belief that the other agent is irrationally exuberant. Finally, numerical simulations illustrate how an unpredictable switch from the REE to a BSE may occur endogenously when both coexist and are learnable.

Suggested Citation

  • Gaetano Gaballo, 2008. "Interactive Learning and Behavioral Sunspots," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 1008, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
  • Handle: RePEc:usi:depfid:1008
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    File URL: http://repec.deps.unisi.it/depfid/text1008.pdf
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    References listed on IDEAS

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    1. Chryssi Giannitsarou, 2003. "Heterogeneous Learning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 885-906, October.
    2. Guse, Eran A., 2005. "Stability properties for learning with heterogeneous expectations and multiple equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1623-1642, October.
    3. Guesnerie, Roger, 1992. "An Exploration of the Eductive Justifications of the Rational-Expectations Hypothesis," American Economic Review, American Economic Association, pages 1254-1278.
    4. Roger Guesnerie, 2005. "Assessing Rational Expectations 2: "Eductive" Stability in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072580, January.
    5. Seppo Honkapohja & Kaushik Mitra, 2006. "Learning Stability in Economies with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 284-309, April.
    6. George W. Evans & Seppo Honkapohja & Noah Williams, 2010. "Generalized Stochastic Gradient Learning," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 237-262, February.
    7. Branch, William A. & Evans, George W., 2006. "Intrinsic heterogeneity in expectation formation," Journal of Economic Theory, Elsevier, vol. 127(1), pages 264-295, March.
    8. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    excess volatility; behavioral uncertainty; intrinsic heterogeneity; statistical learning; structural change.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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