Intrinsic Heterogeneity in Expectation Formation

Show full item record

Title: Intrinsic Heterogeneity in Expectation Formation
Author: Branch, William A.; Evans, George W., 1949-
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.
Date: 2003-05-16

Files in this item

Files Size Format View
UO-2003-32_Evans_Intrinsic.pdf 490.8Kb PDF View/Open

This item appears in the following Collection(s)

Show full item record