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Multiple Equilibria in Heterogeneous Expectations Models

Author

Listed:
  • Branch William

    (College of William and Mary)

  • McGough Bruce

    (Oregon State University)

Abstract

This paper fills an important gap in the literature on determinacy and existence of sunspot equilibria in stochastic linear self-referential models. The results in this paper demonstrate that heterogeneity in expectations may alter a model's regions of determinacy. We show how to associate with a heterogeneous expectations model (HE-model) a rational expectations model (ARE-model), the solutions to which are the equilibria of the HE-model. This association recasts the analysis of determinacy in the HE-model to analysis of determinacy in the ARE-model. We proceed to study a forward looking model and find that the stability properties of rational expectations models may not be robust. In particular, we present new results showing that in some models even a very small fraction of non-rational agents may preclude rational agents from coordinating on sunspots. Also, we present parameterizations of the model in which sunspots exist in the heterogeneous model when they do not exist in the rational expectations version of the model.

Suggested Citation

  • Branch William & McGough Bruce, 2004. "Multiple Equilibria in Heterogeneous Expectations Models," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-16, December.
    • Handle: RePEc:bpj:bejmac:v:contributions.4:y:2004:i:1:n:12
    DOI: 10.2202/1534-6005.1197
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    Citations

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    Cited by:

    1. Michele Berardi, 2009. "Monetary Policy with Heterogeneous and Misspecified Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 79-100, February.
    2. Calvert Jump, Robert & Hommes, Cars & Levine, Paul, 2019. "Learning, heterogeneity, and complexity in the New Keynesian model," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 446-470.
    3. Branch, William A. & McGough, Bruce, 2010. "Dynamic predictor selection in a new Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1492-1508, August.
    4. Liam Graham, 2011. "Learning, information and heterogeneity," CDMA Working Paper Series 201113, Centre for Dynamic Macroeconomic Analysis.
    5. Gomes, Orlando, 2012. "Attentiveness cycles: Synchronized behavior and aggregate fluctuations," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 66(3), October.
    6. Parke, William R. & Waters, George A., 2014. "On The Evolutionary Stability Of Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 18(7), pages 1581-1606, October.
    7. Orlando Gomes, . "Volatility, Heterogeneous Agents and Chaos," The Electronic Journal of Evolutionary Modeling and Economic Dynamics, IFReDE - Université Montesquieu Bordeaux IV.
    8. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
    9. repec:fgv:epgrbe:v:66:n:3:a:1 is not listed on IDEAS
    10. Eran Guse, 2004. "Learning with Heterogeneous Expectations in an Evolutionary World," Computing in Economics and Finance 2004 99, Society for Computational Economics.
    11. Bruneau, Catherine & Delatte, Anne-Laure & Fouquau, Julien, 2014. "Was the European sovereign crisis self-fulfilling? Empirical evidence about the drivers of market sentiments," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 38-51.
    12. Di Bartolomeo, Giovanni & Di Pietro, Marco & Giannini, Bianca, 2016. "Optimal monetary policy in a New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 373-387.
    13. Matthias Lengnick & Hans-Werner Wohltmann, 2013. "Agent-based financial markets and New Keynesian macroeconomics: a synthesis," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 1-32, April.
    14. Nakov, Anton & Nuño, Galo, 2015. "Learning from experience in the stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 224-239.
    15. Gasteiger, Emanuel, 2018. "Do Heterogeneous Expectations Constitute A Challenge For Policy Interaction?," Macroeconomic Dynamics, Cambridge University Press, vol. 22(8), pages 2107-2140, December.
    16. Jonathan J Adams, 2023. "Equilibrium Determinacy With Behavioral Expectations," Working Papers 001008, University of Florida, Department of Economics.
    17. Gasteiger, Emanuel, 2021. "Optimal constrained interest-rate rules under heterogeneous expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 190(C), pages 287-325.
    18. Jump, Robert Calvert & Levine, Paul, 2019. "Behavioural New Keynesian models," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 59-77.
    19. Guse, Eran A., 2010. "Heterogeneous expectations, adaptive learning, and evolutionary dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 74(1-2), pages 42-57, May.
    20. repec:wvu:wpaper:09-01 is not listed on IDEAS
    21. Berardi, Michele, 2011. "Fundamentalists vs. chartists: Learning and predictor choice dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 776-792, May.
    22. William Branch & Bruce McGough, 2011. "Business cycle amplification with heterogeneous expectations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 47(2), pages 395-421, June.
    23. Bruce McGough & Ryuichi Nakagawa, 2019. "Stability of Sunspot Equilibria under Adaptive Learning with Imperfect Information," Working Papers on Central Bank Communication 005, University of Tokyo, Graduate School of Economics.

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