Behavioral Learning Equilibria

Cars Hommes and M. Zhu ()
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M. Zhu: University of Amsterdam

No 12-09, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: We propose behavioral learning equilibria as a plausible explanation of coordination of individual expectations and aggregate phenomena such as excess volatility in stock prices and high persistence in inflation. Boundedly rational agents use a simple univariate linear forecasting rule and correctly forecast the unconditional sample mean and first-order sample autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the structure of the economy. The simplicity of behavioral learning equilibria makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model with AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria co-exist, learning exhibits path dependence and inflation may switch between low and high persistence regimes.

Date: 2012
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Related works:
Journal Article: Behavioral learning equilibria (2014)
Working Paper: Behavioral Learning Equilibria (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ams:ndfwpp:12-09

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