Intrinsic Heterogeneity in Expectation Formation
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Date
2003-05-16
Authors
Branch, William A.
Evans, George W., 1949-
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept. of Economics
Abstract
We introduce the concept of a Misspecification Equilibrium to dynamic macroeconomics. Agents choose between a list of misspecified econometric models and base their selection on relative forecast performance. A Misspecification Equilibrium is an equilibrium stochastic process in which agents forecast optimally given their choices, with the forecasting model parameters and predictor proportions endogenously determined. For appropriate conditions on the exogenous driving process and the degree of feedback of expectations, the Misspecification Equilibrium will exhibit Intrinsic Heterogeneity. With Intrinsic Heterogeneity more than one misspecified model receives positive weight in the distribution of predictors across agents, even in the neoclassical limit in which only the most successful predictors are used.
Description
Keywords
Mathematical and quantitative methods, Macroeconomics and monetary economics, Expectations, Prices, business fluctuations, and cycles, Speculations, Mathematical methods and programming, Existence and stability conditions of equilibrium