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Beyond rational expectations: the effects of heuristic switching in an overlapping generations model

Brecht Boone (UGent) and Ewoud Quaghebeur (UGent)
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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

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Citation

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Chicago
Boone, Brecht, and Ewoud Quaghebeur. 2018. “Beyond Rational Expectations: The Effects of Heuristic Switching in an Overlapping Generations Model.” Journal of Economic Behavior & Organization 155: 349–364.
APA
Boone, B., & Quaghebeur, E. (2018). Beyond rational expectations: the effects of heuristic switching in an overlapping generations model. JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION, 155, 349–364.
Vancouver
1.
Boone B, Quaghebeur E. Beyond rational expectations: the effects of heuristic switching in an overlapping generations model. JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION. Elsevier ; 2018;155:349–64.
MLA
Boone, Brecht, and Ewoud Quaghebeur. “Beyond Rational Expectations: The Effects of Heuristic Switching in an Overlapping Generations Model.” JOURNAL OF ECONOMIC BEHAVIOR & ORGANIZATION 155 (2018): 349–364. Print.
@article{8547532,
  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.},
  author       = {Boone, Brecht and Quaghebeur, Ewoud},
  issn         = {0167-2681},
  journal      = {JOURNAL OF ECONOMIC BEHAVIOR \& ORGANIZATION},
  language     = {eng},
  pages        = {349--364},
  publisher    = {Elsevier },
  title        = {Beyond rational expectations: the effects of heuristic switching in an overlapping generations model},
  url          = {http://dx.doi.org/10.1016/j.jebo.2018.09.007},
  volume       = {155},
  year         = {2018},
}

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