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Volatility, Heterogeneous Agents and Chaos

  • Orlando Gomes

    (Escola Superior de Comunicação Social)

Agent heterogeneity has been used in recent economic literature to justify nonlinear dynamics for the time paths of aggregate economic variables. In this paper, the mechanism through which heterogeneous agents leads to chaotic motion is explained. Adding to a system with initial behavior heterogeneity an adaptive learning rule based on discrete choice theory, one is able to encounter a reasonable explanation for nonlinear motion. The adaptive learning / bounded rationality rule is not the only ingredient necessary for the absence of a long run steady state; heterogeneity must also imply that the several behavior possibilities alternate as the best behavioral choice. Only in such circumstances heterogeneity persists and an unpredictable outcome is likely to arise. The paper develops two models. The first is a generic approach that exemplifies how heterogeneity concerning the volatility of two stochastic processes may lead to chaotic motion; the second is a utility maximization setup, where the source of heterogeneity is investment decisions.

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Paper provided by EconWPA in its series GE, Growth, Math methods with number 0409010.

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Length: 18 pages
Date of creation: 28 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpge:0409010
Note: Type of Document - pdf; pages: 18
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  9. Kurz, Mordecai, 1994. "On the Structure and Diversity of Rational Beliefs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(6), pages 877-900, October.
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  13. Jess Benhabib & Stephanie Schmitt-Grohé & Martín Uribe, 2002. "Chaotic Interest-Rate Rules," American Economic Review, American Economic Association, vol. 92(2), pages 72-78, May.
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