1. Beyond rational expectations: The effects of heuristic switching in an Overlapping Generations model.
- Author
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Boone, Brecht and Quaghebeur, Ewoud
- Subjects
- *
RATIONALIZATION (Sociology) , *SOCIAL theory , *RATIONALISM , *SOCIAL institutions , *HEURISTIC - Abstract
Highlights • Transitional dynamics in an Overlapping Generations model crucially depend on expectations. • Differences between rational expectations and heuristic switching dynamics are analysed. • Heuristic switching has a stabilising effect on transitional dynamics. • In the absence of heuristic switching, dynamics can exhibit permanent oscillations. Abstract We explore the transitional dynamics in an Overlapping Generations framework with and without heuristic switching. Agents use simple heuristics to forecast the interest rate and the real wage. The fraction of agents using a specific heuristic depends on its relative forecasting performance. In the absence of heuristic switching, the results indicate that there is a lot of variation in the transitional dynamics over different parameter values and heuristics. When agents switch between heuristics, however, the variation in the transitional dynamics decreases significantly. We show that heuristic switching has a stabilising effect on transitional dynamics that would otherwise exhibit permanent oscillations. [ABSTRACT FROM AUTHOR]
- Published
- 2018
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