Multiple Equilibria in Heterogeneous Expectations Models

William A. Branch () and Bruce McGough ()

Contributions to Macroeconomics, 2004, vol. 4, issue 1, pages 1197-1197

Abstract: This paper fills an important gap in the literature on determinacy and existence of sunspot equilibria in stochastic linear self-referential models. The results in this paper demonstrate that heterogeneity in expectations may alter a model's regions of determinacy. We show how to associate with a heterogeneous expectations model (HE-model) a rational expectations model (ARE-model), the solutions to which are the equilibria of the HE-model. This association recasts the analysis of determinacy in the HE-model to analysis of determinacy in the ARE-model. We proceed to study a forward looking model and find that the stability properties of rational expectations models may not be robust. In particular, we present new results showing that in some models even a very small fraction of non-rational agents may preclude rational agents from coordinating on sunspots. Also, we present parameterizations of the model in which sunspots exist in the heterogeneous model when they do not exist in the rational expectations version of the model.

Keywords: Heterogeneous Beliefs; Adaptive Expectations; Rational Expectations; Sunspot Equilibria (search for similar items in EconPapers)
JEL-codes: C62 (search for similar items in EconPapers)
Note: oai:bepress:bejm-1197
View list of references View citations in EconPapers

Downloads: (external link)
http://www.bepress.c ... le=1197&context=bejm (application/pdf)
Subscription to the journal may be required to access full texts.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This journal article can be ordered from
http://www.bepress.com/subscriptions.html

Access Statistics for this article

More articles in Contributions to Macroeconomics from Berkeley Electronic Press
Series data maintained by Christopher F. Baum ().