Very preliminary (Please don’t cite) Heterogeneous Expectations, Market Dynamics and Social Welfare
نویسنده
چکیده
This paper explores the extent to which the lack of rationality of economic agents has affected the economic fluctuations and the social welfare of the U.S. hog market. A group of articles has ascribed the business cycles of the hog market, observed by economists as early as the last century, mainly to the lack of rationality (cobweb expectations) of economic agents. In contrast, others, assuming the full rationality of economic agents, have ascribed them to production lags and external shocks. These two streams of thought are reconciled in this paper by adopting the mechanics of conventional rational expectations models and assuming heterogeneity in expectations. The dynamic model presented in this paper assumes two types of economic agents. One (rational agent) has rational expectations and the other (boundedly rational agent) has cobweb expectations. The fraction of boundedly rational agents is estimated along with other deep parameters of the model using the actual data of the market. Empirical test results indicate that some fraction of economic agents in the U.S. hog market are boundedly rational. Based on the model and the estimation results, simulation experiments can be performed to investigate how the presence of boundedly rational economic agents has affected the volatility of the economic variables and the social welfare of the market. This paper briefly describes the methodologies. The simulation results will be reported in the revised version. JEL Classification: C61, C62, E32, E37
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