Business Cycles and Interdependent Expectations

Burkhard Flieth () and John Foster ()
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Burkhard Flieth: Max Planck Institute

No 923, Computing in Economics and Finance 1999 from Society for Computational Economics

Abstract: In the process of expectations formation, autonomous economic agents are usually assumed to form homogeneous expectations, e.g. adaptive or extrapolative, on former or current evaluations, or to act according to the rational-expectations hypothesis. In this paper we use a model of interdependent expectations formation, assuming that agents not only use information about the current economic situation but also exchange their opinions and information with other agents. The typical dynamic behavior of such a model yields multiple equilibria or persistent attracting distributions, which can, however, jump suddenly to another attracting distribution when a change occurs. Using data from the Federal Statistical Office of Germany to obtain indicators of the economic situation and data from the German Ifo-business-climate-poll about entrepreneur's expectations, it can be shown that, while this special kind of dynamic behavior is quite obvious in the expectations-formation process, it is not apparent in real series. We use the data for producers' expectations in the case of consumption goods to calculate the interaction strength, i.e., the importance of the interdependent expectations formation in the process. Our results suggest that there has been a tendency towards decreased uncertainty and, therefore, a tendency for the interaction to become less important in the expectations-formation process. It is also shown that there seem to be long waves in attitudes.

Date: 1999-03-01
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