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Beyond rational expectations: The effects of heuristic switching in an Overlapping Generations model

Brecht Boone () and Ewoud Quaghebeur

Journal of Economic Behavior & Organization, 2018, vol. 155, issue C, 349-364

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.

Keywords: Heuristic switching; Heterogeneous agents; Fiscal policy; Transitional dynamics; Overlapping Generations (search for similar items in EconPapers)
JEL-codes: D83 D84 E60 (search for similar items in EconPapers)
Date: 2018
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Working Paper: BEYOND RATIONAL EXPECTATIONS: THE EFFECTS OF HEURISTIC SWITCHING IN AN OVERLAPPING GENERATIONS MODEL (2018) Downloads
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