Expectational Business Cycles

Bank of Finland Discussion Paper No. 19/2004

38 Pages Posted: 14 Dec 2004

See all articles by Eran Guse

Eran Guse

University of Cambridge - Faculty of Economics and Politics

Date Written: December 2004

Abstract

I introduce Expectational Business Cycles where aggregate activity fluctuates due to learning, heterogeneous updating rules and random changes in the social norm predictor. Agents use one of two updating rules to learn the equilibrium values while heterogeneity is dictated via an evolutionary process. Uncertainty of a new equilibrium, due to a shock to the structure of the economy, results in a sudden decrease in output. As agents learn the equilibrium, output slowly increases to its equilibrium value. These business cycles arrive faster, are longer and more severe as agents possess less rationality.

Keywords: Adaptive learning, aggregate fluctuations, heterogeneous expectations

JEL Classification: C62, D84, E37

Suggested Citation

Guse, Eran A., Expectational Business Cycles (December 2004). Bank of Finland Discussion Paper No. 19/2004, Available at SSRN: https://ssrn.com/abstract=631461 or http://dx.doi.org/10.2139/ssrn.631461

Eran A. Guse (Contact Author)

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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