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Type: Journal article
Title: On Forecasting Heterogeneity, Irrational Exuberance, and the Multiplicity of Rational Expectations Equilibria
Author: Weder, M.
Citation: Journal of Economics, 2002; 76(3):201-215
Publisher: Springer-Verlag Wien
Issue Date: 2002
ISSN: 0931-8658
Abstract: This paper evaluates the role of limited rationality in an equilibrium model with indeterminacy of rational expectations. We assume a world in which a fraction of agents makes predictions via rational expectations and the other fraction follows simple rule-of-thumb schemes. For all considered cases, the co-presence of naive agents tends to reduce the possibility of sunspot equilibria. We also consider the case that some agents are systematically exuberant. Under this scenario, the effect of naive agents is reversed: bullishness may in fact destabilize markets.
Keywords: Indeterminacy
rational expectations
limited rationality
DOI: 10.1007/s007120200040
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Appears in Collections:Aurora harvest
Economics publications

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