Formation of Rationally Heterogeneous Expectations

CentER Discussion Paper Series No. 2012-083

39 Pages Posted: 22 Oct 2012

See all articles by Damjan Pfajfar

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Date Written: October 22, 2012

Abstract

This paper models expectation formation by taking into account that agents produce heterogeneous expectations due to model uncertainty, informational frictions and different capacities for processing information. We show that there are two general classes of steady states within this framework: those where strictly dominated forecasting rules vanish, and intrinsic heterogeneous steady states where a positive proportion of agents use a more costly perfect foresight. This demonstrates that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly, and do not exhibit identical performance in the long run.

Keywords: heterogeneous expectations, cobweb model, adaptive learning, rational expectations

JEL Classification: C62, D83, D84, E30

Suggested Citation

Pfajfar, Damjan, Formation of Rationally Heterogeneous Expectations (October 22, 2012). CentER Discussion Paper Series No. 2012-083. Available at SSRN: https://ssrn.com/abstract=2165199 or http://dx.doi.org/10.2139/ssrn.2165199

Damjan Pfajfar (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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