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1 PSE - Paris School of Economics

Abstract : In this paper, I argue that agents may prefer learning a misspecified model instead of learning the rational expectation model. I consider an economy with two types of agent. Fundamentalists learn a model where endogenous variables depend on relevant exogenous variables whereas followers learn a model where endogenous variables are function of their lagged values. A Fundamentalist is like a DSGE econometrician and a follower is like a VAR econometrician. If followers resp. fundamentalists give more accurate forecasts, a fraction of fundamentalists resp. followers switch to the follower model. I apply this algorithm in a linear model. Results are mixed for rational expectations. Followers may dominate in the long run when there are strategic complementarities and high persistence of exogenous variables. When ad-ditionnal issues are introduced, like structural breaks or unobservable exogenous variable, followers can have a significant edge on fundamentalists. I apply the algo-rtihm in three economic models a cobweb model, an asset price model and a simple macroeconomic model. JEL Classification: D83,D84

Keywords : cobweb model consistent expectations Adaptive learning





Author: Elliot Aurissergues -

Source: https://hal.archives-ouvertes.fr/



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