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Beyond rational expectations: The effects of heuristic switching in an Overlapping Generations model

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  • Boone, Brecht
  • Quaghebeur, Ewoud

Abstract

We explore the transitional dynamics in an Overlapping Generations framework with and without heuristic switching. Agents use simple heuristics to forecast the interest rate and the real wage. The fraction of agents using a specific heuristic depends on its relative forecasting performance. In the absence of heuristic switching, the results indicate that there is a lot of variation in the transitional dynamics over different parameter values and heuristics. When agents switch between heuristics, however, the variation in the transitional dynamics decreases significantly. We show that heuristic switching has a stabilising effect on transitional dynamics that would otherwise exhibit permanent oscillations.

Suggested Citation

  • Boone, Brecht & Quaghebeur, Ewoud, 2018. "Beyond rational expectations: The effects of heuristic switching in an Overlapping Generations model," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 349-364.
    • Handle: RePEc:eee:jeborg:v:155:y:2018:i:c:p:349-364
    DOI: 10.1016/j.jebo.2018.09.007
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    1. Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, vol. 117(520), pages 603-636, April.
    2. Heemeijer Peter & Hommes Cars & Sonnemans Joep & Tuinstra Jan, 2012. "An Experimental Study on Expectations and Learning in Overlapping Generations Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 16(4), pages 1-49, October.
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    11. William A. Brock & Cars H. Hommes, 2001. "A Rational Route to Randomness," Chapters, in: W. D. Dechert (ed.), Growth Theory, Nonlinear Dynamics and Economic Modelling, chapter 16, pages 402-438, Edward Elgar Publishing.
    12. Heylen Freddy & Van de Kerckhove Renaat, 2013. "Employment by age, education, and economic growth: effects of fiscal policy composition in general equilibrium," The B.E. Journal of Macroeconomics, De Gruyter, vol. 13(1), pages 49-103, October.
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    More about this item

    Keywords

    Heuristic switching; Heterogeneous agents; Fiscal policy; Transitional dynamics; Overlapping Generations;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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