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The B.E. Journal of Macroeconomics

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Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Kambourov, Gueorgui / Lambertini, Luisa / Pavoni, Nicola / Ruhl, Kim / Nimark, Kristoffer / Wang, Pengfei


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Multiple Equilibria in Heterogeneous Expectations Models

William Branch1 / Bruce McGough2

1College of William and Mary,

2Oregon State University,

Citation Information: Contributions in Macroeconomics. Volume 4, Issue 1, ISSN (Online) 1534-6005, DOI: 10.2202/1534-6005.1197, December 2004

Publication History

Published Online:
2004-12-15

This paper fills an important gap in the literature on determinacy and existence of sunspot equilibria in stochastic linear self-referential models. The results in this paper demonstrate that heterogeneity in expectations may alter a model's regions of determinacy. We show how to associate with a heterogeneous expectations model (HE-model) a rational expectations model (ARE-model), the solutions to which are the equilibria of the HE-model. This association recasts the analysis of determinacy in the HE-model to analysis of determinacy in the ARE-model. We proceed to study a forward looking model and find that the stability properties of rational expectations models may not be robust. In particular, we present new results showing that in some models even a very small fraction of non-rational agents may preclude rational agents from coordinating on sunspots. Also, we present parameterizations of the model in which sunspots exist in the heterogeneous model when they do not exist in the rational expectations version of the model.

Keywords: Heterogeneous Beliefs; Adaptive Expectations; Rational Expectations; Sunspot Equilibria

Citing Articles

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[1]
Matthias Lengnick and Hans-Werner Wohltmann
Journal of Economic Interaction and Coordination, 2013, Volume 8, Number 1, Page 1
[2]
William A. Branch and Bruce McGough
Economic Theory, 2011, Volume 47, Number 2-3, Page 395
[3]
Catherine Bruneau, Anne-Laure Delatte, and Julien Fouquau
Journal of Macroeconomics, 2014, Volume 42, Page 38
[4]
Michele Berardi
Journal of Economic Dynamics and Control, 2007, Volume 31, Number 10, Page 3203
[5]
MICHELE BERARDI
Journal of Money, Credit and Banking, 2009, Volume 41, Number 1, Page 79

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