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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.

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  • 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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    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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