Nonlinear Expectation Formation, Endogenous Business Cycles and Stylized Facts
Frank Westerhoff ()
Studies in Nonlinear Dynamics & Econometrics, 2006, vol. 10, issue 4, 1-17
We modify Samuelsons multiplier-accelerator model to explore the influence of expectations on fluctuations in economic activity. Within our model, the agents use a nonlinear mix of extrapolative and regressive forecast rules to predict the output. Our model is able to mimic some generic features of business cycles. In particular, consumption is procyclical and fluctuates less than output while investment is procyclical and fluctuates more than output.
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