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Boom-Bust Cycles of Learning, Investment and Disagreement

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  • Osnat Zohar

    (Bank of Israel)

Abstract

Real activity as well as expectations often exhibit asymmetric dynamics, namely, they increase gradually with occasional large downturns. Such dynamics emerge in a model with strong feedback between activity and information. In the model, active investment reveals private information about the state of the world. An agent (Follower) only learns about another agent's (Loner's) signals from his actions. Equilibrium in the model generates asymmetric cycles: Entry to the market is gradual; exits tend to be abrupt and are followed by slow recoveries. The asymmetry in the cycle is magnified when information is public. If Follower observes Loner's payoffs and not just his actions, he is more likely to defer his entry compared to the benchmark model. Finally, model simulations show a positive correlation between investment and dispersion of beliefs which is largely attributed to the learning mechanism in the model.​

Suggested Citation

  • Osnat Zohar, 2019. "Boom-Bust Cycles of Learning, Investment and Disagreement," Bank of Israel Working Papers 2019.06, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2019.06
    as

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    File URL: https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2019.06.pdf
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    References listed on IDEAS

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    Cited by:

    1. Zohar, Osnat, 2024. "Cyclicality of uncertainty and disagreement," Journal of Monetary Economics, Elsevier, vol. 143(C).
    2. Angelos Kanas & Panagiotis D. Zervopoulos, 2021. "Systemic risk, real GDP growth, and sentiment," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 461-485, August.

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    More about this item

    Keywords

    dynamic learning; asymmetric cycles; slow recovery; private information;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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