Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87535
Authors: 
Hommes, Cars
Zhu, Mei
Year of Publication: 
2013
Series/Report no.: 
Tinbergen Institute Discussion Paper 13-014/II
Abstract: 
We propose behavioral learning equilibria as a plausible explanation of coordination of individual expectations and aggregate phenomena such as excess volatility in stock prices and high persistence in inflation. Boundedly rational agents use a simple univariate linear forecasting rule and correctly forecast the unconditional sample mean and first-order sample autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the structure of the economy. The simplicity of behavioral learning equilibria makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model with AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria co-exist, learning exhibits path dep endence and inflation may switch between low and high persistence regimes.
Subjects: 
Bounded rationality
Stochastic consistent expectations equilibrium
Adaptive learning
Excess volatility
Inflation persistence
JEL: 
E30
C62
D83
D84
Document Type: 
Working Paper

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