Expectational Business Cycles
Bank of Finland Discussion Paper No. 19/2004
38 Pages Posted: 14 Dec 2004
Date Written: December 2004
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
JEL Classification: C62, D84, E37
Suggested Citation: Suggested Citation
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