Research Discussion Papers, Bank of Finland
No 19/2004:
Expectational business cycles
Eran Guse
Abstract: I introduce Expectational Business Cycles where aggregate
activity fluctuates due to learning, heterogeneous updating rules and
random changes in the social norm predictor. Agents use one of two updating
rules to learn the equilibrium values while heterogeneity is dictated via
an evolutionary process. Uncertainty of a new equilibrium, due to a shock
to the structure of the economy, results in a sudden decrease in output. As
agents learn the equilibrium, output slowly increases to its equilibrium
value. These business cycles arrive faster, are longer and more severe as
agents possess less rationality.
Keywords: adaptive learning; aggregate fluctuations; heterogeneous expectations; multiple equilibria; rational expectations; (follow links to similar papers)
JEL-Codes: C62; D84; E37; (follow links to similar papers)
38 pages, October 12, 2004
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