Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/208235
Authors: 
Hommes, Cars H.
Year of Publication: 
2018
Series/Report no.: 
ECB Working Paper 2201
Abstract: 
This survey discusses behavioral and experimental macroeconomics emphasizing a complex systems perspective. The economy consists of boundedly rational heterogeneous agents who do not fully understand their complex environment and use simple decision heuristics. Central to our survey is the question under which conditions a complex macro-system of interacting agents may or may not coordinate on the rational equilibrium outcome. A general finding is that under positive expectations feedback (strategic complementarity) - where optimistic (pessimistic) expectations can cause a boom (bust) - coordination failures are quite common. The economy is then rather unstable and persistent aggregate fluctuations arise strongly amplified by coordination on trend-following behavior leading to (almost-)self-fulfilling equilibria. Heterogeneous expectations and heuristics switching models match this observed micro and macro behaviour surprisingly well. We also discuss policy implications of this coordination failure on the perfectly rational aggregate outcome and how policy can help to manage the self-organization process of a complex economic system.
Subjects: 
Expectations feedback
learning
coordination failure
almost selffulfilling equilibria
simple heuristics
experimental & behavioral macro-economics
JEL: 
D84
D83
E32
C92
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3306-3
Document Type: 
Working Paper

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