Boom-Bust Cycles of Learning, Investment and Disagreement

Osnat Zohar

No 2019.06, Bank of Israel Working Papers from Bank of Israel

Abstract: Real activity as well as expectations often exhibit asymmetric dynamics, namely, they increase gradually with occasional large downturns. Such dynamics emerge in a model with strong feedback between activity and information. In the model, active investment reveals private information about the state of the world. An agent (Follower) only learns about another agent's (Loner's) signals from his actions. Equilibrium in the model generates asymmetric cycles: Entry to the market is gradual; exits tend to be abrupt and are followed by slow recoveries. The asymmetry in the cycle is magnified when information is public. If Follower observes Loner's payoffs and not just his actions, he is more likely to defer his entry compared to the benchmark model. Finally, model simulations show a positive correlation between investment and dispersion of beliefs which is largely attributed to the learning mechanism in the model.​

Keywords: dynamic learning; asymmetric cycles; slow recovery; private information (search for similar items in EconPapers)
JEL-codes: C73 D82 D83 E32 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-05
New Economics Papers: this item is included in nep-bec, nep-cmp, nep-mac and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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