Self-Falsifying Prophecies

16 Pages Posted: 10 Mar 2016

See all articles by Rajiv Sethi

Rajiv Sethi

Barnard College, Columbia University; Santa Fe Institute

Date Written: February 27, 2016

Abstract

Those general perceptions of the macroeconomic environment that are specifically related to the stability properties of the system may be referred to as regime perceptions. Such perceptions affect economic behavior, and hence determine actual stability properties or regime realizations. A fixed point of this mapping from perceptions to realizations is a level of perceived volatility that is self-fulfilling. Using a simple nonlinear business cycle model to illustrate, it is shown that there may exist no such fixed point, in which case all regime perceptions are self-falsifying. This happens because volatility can vary discontinuously with respect to model parameters.

Suggested Citation

Sethi, Rajiv, Self-Falsifying Prophecies (February 27, 2016). Available at SSRN: https://ssrn.com/abstract=2744379 or http://dx.doi.org/10.2139/ssrn.2744379

Rajiv Sethi (Contact Author)

Barnard College, Columbia University ( email )

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HOME PAGE: http://www.columbia.edu/~rs328/

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

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