Intrinsic Heterogeneity in Expectation Formation

William Branch and George Evans

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: We introduce the concept of a Misspecification Equilibrium to dynamic macroeconomics. Agents choose between a list of misspecified econometric models and base their selection on relative forecast performance. A Misspecification Equilibrium is an equilibrium stochastic process in which agents forecast optimally given their choices, with the forecasting model parameters and predictor proportions endogenously determined. For appropriate conditions on the exogenous driving process and the degree of feedback of expectations, the Misspecification Equilibrium will exhibit Intrinsic Heterogeneity. With Intrinsic Heterogeneity more than one misspecified model receives positive weight in the distribution of predictors across agents, even in the neoclassical limit in which only the most successful predictors are used.

Keywords: Cobweb model; heterogeneous beliefs; adaptive learning; rational expectations. (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E30 (search for similar items in EconPapers)
Pages: 30
Date: 2003-05-16, Revised 2004-10-04
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Intrinsic heterogeneity in expectation formation (2006)
Working Paper: Intrinsic Heterogeneity in Expectation Formation (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ore:uoecwp:2003-32

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