Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/233208 
Year of Publication: 
2021
Series/Report no.: 
IMFS Working Paper Series No. 156
Publisher: 
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS), Frankfurt a. M.
Abstract: 
Can boundedly rational agents survive competition with fully rational agents? The authors develop a highly nonlinear heterogeneous agents model with rational forward looking versus boundedly rational backward looking agents and evolving market shares depending on their relative performance. Their novel numerical solution method detects equilibrium paths characterized by complex bubble and crash dynamics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while rational agents anticipate market crashes after large bubbles and drive prices back close to fundamental value. Overall rational and non-rational beliefs co-evolve over time, with time-varying impact, and their interaction produces complex endogenous bubble and crashes, without any exogenous shocks.
Subjects: 
Heterogeneous agents
trend-extrapolation
bubbles
numerical solution method
JEL: 
C63
E03
E32
E44
E51
Document Type: 
Working Paper

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