Myopic households on a stable path: the neoclassical growth model with rule-based expectations

Andrea Teglio, Michele Catalano and Marko Petrovic

MPRA Paper from University Library of Munich, Germany

Abstract: The neoclassical growth model is extended to include limitations in the forecasting capability of a rational individual, who can predict the future state of the economy only for a short time horizon. Long-term predictions are formulated according to uninformed expectations, relying solely on myopic information about short-run dynamics, such as assuming a future persistent growth rate. Steady-state results are obtained in the case of iso-elastic utility and Cobb-Douglas technology. The model, characterized by forecasting errors and subsequent corrections, exhibits global stability and has relevant implications for welfare and policy. It is analyzed in comparison to the Solow–Swan model and the Ramsey model. Our approach, incorporating behavioral assumptions within a standard optimization rule, successfully yields explicit analytical solutions for the policy function in the neoclassical model. This strategy may also be extended to various modeling streams, including DSGE and HANK models.

Keywords: Expectations; Neoclassical growth; Bounded rationality; Myopic behavior; Dynamic optimization; Time inconsistency. (search for similar items in EconPapers)
JEL-codes: C61 D83 D84 E21 E25 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Myopic households on a stable path: the neoclassical growth model with rule-based expectations (2024)
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