Behavioral learning equilibria

Cars Hommes and Mei Zhu

Journal of Economic Theory, 2014, vol. 150, issue C, 778-814

Abstract: We propose behavioral learning equilibria, where boundedly rational agents learn to use a simple univariate linear forecasting rule with correctly specified unconditional mean and first-order autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the more complex structure of the economy. An important feature of behavioral learning equilibria is simplicity and parsimony, which makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model driven by AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria coexist, learning exhibits path dependence and inflation may switch between low and high persistence regimes.

Keywords: Bounded rationality; Stochastic consistent expectations equilibrium; Adaptive learning; Excess volatility; Inflation persistence (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E30 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (59)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053113001476
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Behavioral Learning Equilibria (2013)
Working Paper: Behavioral Learning Equilibria (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:150:y:2014:i:c:p:778-814

DOI: 10.1016/j.jet.2013.09.002

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().