Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations

Serena Sordi and Alessandro Vercelli

Journal of Economic Behavior & Organization, 2012, vol. 83, issue 3, 544-557

Abstract: We examine the role of expectations in a model aimed to explain financial fluctuations. The model restates the core of Minsky's financial instability hypothesis, focusing on the role of expectations. The hypotheses concerning the process of formation and revision of expectations are discussed in light of Keynes's epistemological view of the behavior of boundedly rational agents under conditions of strong uncertainty. These hypotheses are formalized by drawing on recent advances in complex dynamics, decision theory and behavioral economics. We show that widespread use of extrapolative expectations by economic agents produces a high degree of financial instability that may lead to a serious financial crisis, and that the use by economic agents of a mix of extrapolative and regressive expectations reduces the dynamical instability of the model but may give rise to complex dynamics.

Keywords: Financial instability; Heterogeneous expectations; Extrapolative expectations; Regressive expectations; Complex dynamics (search for similar items in EconPapers)
JEL-codes: C61 D84 G01 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (16)

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Working Paper: Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:83:y:2012:i:3:p:544-557

DOI: 10.1016/j.jebo.2012.05.012

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