Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-27T09:14:14.087Z Has data issue: false hasContentIssue false
  • English
  • Français

LEARNING FROM THE EXPECTATIONS OF OTHERS

Published online by Cambridge University Press:  01 June 2008

JIM GRANATO ,
ERAN A. GUSE  and
M. C. SUNNY WONG
JIM GRANATO
Affiliation:
University of Houston
ERAN A. GUSE
Affiliation:
University of Cambridge
M. C. SUNNY WONG*
Affiliation:
University of San Francisco
*
Address correspondence to: M. C. Sunny Wong, Department of Economics, University of San Francisco, 2130 Fulton Street, San Francisco, CA 94121, USA; e-mail: mwong11@usfca.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper explores the equilibrium properties of boundedly rational heterogeneous agents under adaptive learning. In a modified cobweb model with a Stackelberg framework, there is an asymmetric information diffusion process from leading to following firms. It turns out that the conditions for at least one learnable equilibrium are similar to those under homogeneous expectations. However, the introduction of information diffusion leads to the possibility of multiple equilibria and can expand the parameter space of potential learnable equilibria. In addition, the inability to correctly interpret expectations will cause a “boomerang effect” on the forecasts and forecast efficiency of the leading firms. The leading firms' mean square forecast error can be larger than that of following firms if the proportion of following firms is sufficiently large.

Keywords

Adaptive LearningExpectational StabilityInformation DiffusionCobweb ModelHeterogeneous Expectations
Type
Articles
Information
Macroeconomic Dynamics , Volume 12 , Issue 3 , June 2008 , pp. 345 - 377
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adam, Klaus (2005) Learning to forecast and cyclical behavior of output and inflation. Macroeconomic Dynamics 9, 1–27.CrossRefGoogle Scholar
Adam, Klaus, Evans, George W., and Honkapohja, Seppo (2006) Are hyperinflation paths learnable? Journal of Economic Dynamics and Control 30, 2725–2748.CrossRefGoogle Scholar
Arifovic, Jasmina (1994) Genetic algorithm learning and the cobweb model. Journal of Economic Dynamics and Control 18, 3–28.CrossRefGoogle Scholar
Backus, David and Driffill, John (1985) Inflation and reputation. American Economic Review 75, 530–538.Google Scholar
Barro, Robert J. and Gordon, David B. (1983) Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics 1, 101–121.CrossRefGoogle Scholar
Bernanke, Ben S., Laubach, Thomas, Mishkin, Frederic S., and Posen, Adam S (1999) Inflation Targeting: Lessons from the International Experience. Princeton, NJ: Princeton University Press.Google Scholar
Bernanke, Ben S. and Woodford, Michael (1997) Inflation forecasts and monetary policy. Journal of Money, Credit, and Banking 29, 653–684.CrossRefGoogle Scholar
Bomfim, Antulio N. (2001) Heterogeneous forecasts and aggregate dynamics. Journal of Monetary Economics 47, 145–161.CrossRefGoogle Scholar
Branch, William A. and McGough, Bruce (Forthcoming) Replicator dynamics in a cobweb model with rationally heterogeneous expectations. Journal of Economic Behavior and Organization.Google Scholar
Branch, William A. and Evans, George W. (2006) Intrinsic heterogeneity in expectation formation. Journal of Economic Theory 127, 264–295.CrossRefGoogle Scholar
Brock, William A. and Hommes, Cars H. (1997) A rational route to randomness. Econometrica 65, 1059–1095.CrossRefGoogle Scholar
Bray, Margaret (1982) Learning, estimation, and the stability of rational expectations. Journal of Economic Theory 26, 318–339.CrossRefGoogle Scholar
Bray, Margaret and Savin, Nathan E. (1986) Rational expectations, equilibria, learning, and model specification. Econometrica 54, 1129–1160.CrossRefGoogle Scholar
Bullard, James B., Evans, George W., and Honkapohja, Seppo (2005) Near Rational Exuberance. Cambridge working paper in Economics #0546.CrossRefGoogle Scholar
Carroll, Christopher D. (2003) Macroeconomic expectations of households and professional forecasters. Quarterly Journal of Economics 118, 269–298.CrossRefGoogle Scholar
Devenow, Andrea and Welch, Ivo (1996) Rational herding in financial economics. European Economic Review 40, 603–615.CrossRefGoogle Scholar
Evans, George W. (1983) The stability of rational expectations in macroeconomic models. In Frydman, Roman and Phelps, Edmund S. (eds.), Individual Forecasting and Aggregate Outcomes, pp. 69–94. New York: Cambridge University Press.Google Scholar
Evans, George W. (1989) The fragility of sunspots and bubbles. Journal of Monetary Economics 23, 297–313.CrossRefGoogle Scholar
Evans, George W. and Honkapohja, Seppo (1992) On the robustness of bubbles in linear RE models. International Economic Review 33, 1–14.CrossRefGoogle Scholar
Evans, George W. and Honkapohja, Seppo (1996) Least squares learning with heterogeneous expectations. Economics Letters 53, 197–201.CrossRefGoogle Scholar
Evans, George W. and Honkapohja, Seppo (2001) Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Evans, George W. and Ramey, Garey (1998) Calculation, adaptation and rational expectations. Macroeconomic Dynamics 2, 156–182.CrossRefGoogle Scholar
Frydman, Roman and Phelps, Edmund S. (ed.) (1983) Individual Forecasting and Aggregate Outcomes. Cambridge: Cambridge University Press.Google Scholar
Giannitsarou, Chryssi (2003) Heterogeneous learning. Review of Economic Dynamics 6, 885–906.CrossRefGoogle Scholar
Granato, Jim and Wong, M.C. Sunny. (2006) The Role of Policymakers in Business Cycle Fluctuations. New York: Cambridge University Press.CrossRefGoogle Scholar
Guse, Eran A. (2005) Stability properties for learning with heterogeneous expectations and multiple equilibria. Journal of Economic Dynamics and Control 29, 1623–1642.CrossRefGoogle Scholar
Guse, Eran A. (Forthcoming) Learning in a Misspecified Multivariate Self-Referential Linear Stochastic Model. Cambridge working paper in economics #0548.Google Scholar
Guse, Eran A. (2006) Heterogeneous Expectations, Adaptive Learning, and Evolutionary Dynamics. Mimeo, University of Cambridge.Google Scholar
Haltiwanger, John C. and Waldman, Michael (1985) Rational expectations and the limits of rationality: An analysis of heterogeneity. American Economic Review 75, 326–340.Google Scholar
Hamilton, James D. (1994) Time Series Analysis. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Honkapohja, Seppo and Mitra, Kaushik (2003) Learning with bounded memory in stochastic models. Journal of Economic Dynamics and Control 27, 1437–1457.CrossRefGoogle Scholar
Honkapohja, Seppo and Mitra, Kaushik (2006) Learning stability in economics with heterogeneous agents. Review of Economic Dynamics 9, 284–309.CrossRefGoogle Scholar
Kandel, Eugene and Zilberfarb, Ben-Zion (1999) Differential interpretation of information in inflation forecasts. Review of Economics and Statistics 81, 217–226.CrossRefGoogle Scholar
Lucas, Robert E Jr., (1972) Expectations and the neutrality of money. Journal of Economic Theory 4, 103–124.CrossRefGoogle Scholar
Lucas, Robert E Jr. (1973) Some international evidence on output-inflation tradeoffs. American Economic Review 63, 326–334.Google Scholar
McCallum, Bennett T. (1983) On nonuniqueness in linear rational expectations models: An attempt at perspective. Journal of Monetary Economics, 11, 134–168.CrossRefGoogle Scholar
McCallum, Bennett T. (1999) Role of the minimal state variable criterion in rational expectations models. International Tax and Public Finance, 6, 621–639.CrossRefGoogle Scholar
Muth, John F. (1961) Rational expectations and the theory of price movements. Econometrica 29, 315–335.CrossRefGoogle Scholar
Nickalls, R. W. D. (1993) A new approach to solving the Cubic: Cardan's solution revealed. The Mathematical Gazette 77, 354–359.CrossRefGoogle Scholar
Romer, Christina D. and Romer, David H. (2000) Federal reserve information and the behavior of interest rates. American Economic Review 90, 429–457.CrossRefGoogle Scholar
Sargent, Thomas J. (1993) Bounded Rationality in Macroeconomics. New York: Oxford University Press.CrossRefGoogle Scholar