BEYOND RATIONAL EXPECTATIONS: THE EFFECTS OF HEURISTIC SWITCHING IN AN OVERLAPPING GENERATIONS MODEL

Brecht Boone and Ewoud Quaghebeur

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We explore the transitional dynamics in an Overlapping Generations framework with and without heuristic switching. Agents use simple heuristics to forecast the interest rate and the real wage. The fraction of agents using a specific heuristic depends on its relative forecasting performance. In the absence of heuristic switching, the results indicate that there is a lot of variation in the transitional dynamics over different parameter values and heuristics. They might even oscillate or diverge. Including heuristic switching has two advantages. First, it decreases the variation in the transitional dynamics significantly. Second, it has a stabilising effect on oscillating or diverging transitional dynamics.

Keywords: Heuristic Switching; Heterogeneous Agents; Fiscal Policy; Transitional Dynamics; Overlapping Generations (search for similar items in EconPapers)
JEL-codes: D83 D84 E60 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2018-01
New Economics Papers: this item is included in nep-dge, nep-exp and nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Beyond rational expectations: The effects of heuristic switching in an Overlapping Generations model (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:18/943

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