Heterogeneous expectations and debt in a growth model for a small open economy

Michael Wegener

Decisions in Economics and Finance, 2014, vol. 37, issue 1, 125-136

Abstract: We extend an aggregative growth model for a small open economy by developing a framework in which boundedly rational agents raise credit in proportion to their expected income. Moreover, these agents are heterogeneous in the sense that they switch between an extrapolative and a regressive forecasting rule with respect to perceived market circumstances. Using a mixture of analytical and numerical tools, we attempt to describe the characteristics of our model’s dynamical system. Our results then suggest that self-fulfilling short-run expectations do not only have important consequences for fluctuations in economic activity but are also a source of simple endogenous dynamics. Copyright Springer-Verlag Italia 2014

Keywords: Endogenous business cycles; Heterogeneous expectations; Nonlinear dynamics; Growth models; E32; C62 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s10203-013-0142-1

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