Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/156150
Authors: 
Hartmann, Florian
Charpe, Matthieu
Flaschel, Peter
Veneziani, Roberto
Year of Publication: 
2016
Series/Report no.: 
Working Paper, Institute of Empirical Economic Research, University of Osnabrück 104
Abstract: 
We consider an alternative modelling approach to the mainstream DSGE paradigm, namely a Dynamic Stochastic General Disequilibrium (DSGD) baseline model of continuous and gradual adjustment processes on interacting real and financial markets. Heterogeneous capital gain expectations (chartists and fundamentalists) are introduced in place of rational expectations and we show that the first type of agents tends to destabilise the economy. An additional feature is that the share of prevailing opinion types is able to switch endogenously. Global stability can be ensured if opinions favour fundamentalist behaviour far off the steady state. This interaction of expectations and population dynamics is bounding the potentially explosive real-financial market interactions, but can enforce irregular behaviour within these bounds when the dynamics is dominated by fundamentalist behavior far off the steady state (at least in the downturn). The size of output and share price fluctuations can be reduced however by imposing suitably chosen policy measures on the dynamics of the private sector.
Subjects: 
output and share price dynamics
heterogeneous expectations
boundedness
persistent irregular fluctuations
policy measures
JEL: 
E12
E24
E31
E52
Document Type: 
Working Paper

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