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Heuristic Expectation Formation And Business Cycles: A Simple Linear Model

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  • Frank H. Westerhoff

Abstract

We develop a Keynesian business cycle model to study how extrapolative and regressive expectation formation rules may affect fluctuations in economic activity. We find that simple expectation formation rules may have an impact on the level and the stability of the equilibrium income, the size of the multiplier and the resulting adjustment process after an exogenous shocks. Our model also reveals that national income may be influenced by how agents perceive their long‐run average income.

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  • Frank H. Westerhoff, 2008. "Heuristic Expectation Formation And Business Cycles: A Simple Linear Model," Metroeconomica, Wiley Blackwell, vol. 59(1), pages 47-56, February.
    • Handle: RePEc:bla:metroe:v:59:y:2008:i:1:p:47-56
    DOI: 10.1111/j.1467-999X.2007.00290.x
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    1. Day, Richard H. & Shafer, Wayne, 1985. "Keynesian chaos," Journal of Macroeconomics, Elsevier, vol. 7(2), pages 277-295.
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    7. Day, Richard H. & Shafer, Wayne, 1985. "Keynesian Chaos," Journal of Macroeconomics, Elsevier, vol. 7(3), pages 277-295.
    8. Heiner, Ronald A, 1983. "The Origin of Predictable Behavior," American Economic Review, American Economic Association, vol. 73(4), pages 560-595, September.
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    Cited by:

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    3. Franke Reiner, 2012. "Microfounded Animal Spirits in the New Macroeconomic Consensus," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-41, October.

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