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Financial crisis and slow recovery with Bayesian learning agents

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  • Ryo Horii
  • Yoshiyasu Ono

Abstract

In a simple continuous‐time model where the learning process affects the willingness to hold liquidity, we provide an intuitive explanation of business cycle asymmetry and postcrisis slow recovery. When observing a liquidity shock, individuals rationally increase their subjective probability of re‐encountering it. It leads to an upward jump in liquidity preference and a discrete fall in consumption. Conversely, as a period without shocks continues, they gradually decrease the subjective probability, reduce liquidity preference, and increase consumption. The recovery process is particularly slow after many shocks are observed within a short period because people do not easily change their pessimistic view.

Suggested Citation

  • Ryo Horii & Yoshiyasu Ono, 2022. "Financial crisis and slow recovery with Bayesian learning agents," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 578-606, December.
    • Handle: RePEc:bla:ijethy:v:18:y:2022:i:4:p:578-606
    DOI: 10.1111/ijet.12322
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    Cited by:

    1. Takashi Kamihigashi, 2022. "Introduction to the special feature section on economic policy and risk management," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 552-553, December.

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