On the preservation of deterministic cycles when some agents perceive them to be random fluctuations

George W. Evans, Seppo Honkapohja, Thomas J. Sargent

    Research output: Contribution to journalArticle

    Abstract

    Some recent equilibrium models give rise to complex but deterministic fluctuations. We modify the hypothesis of universal perfect foresight by injecting into the economy a nonnegligible fraction of less informed agents who optimize their expected utility with respect to the statistical distribution of prices in the deterministic dynamics. For the standard overlapping generations model with money (the 'Samuelson' case) it is proved that if the fraction of consumers with limited knowledge is sufficiently high, then all equilibrium cycles of period k ≥ 2 disappear. The global properties of the case of 2-cycles are studied in detail. A brief analysis of the 'classical' case is also given.

    Original languageEnglish (US)
    Pages (from-to)705-721
    Number of pages17
    JournalJournal of Economic Dynamics and Control
    Volume17
    Issue number5-6
    DOIs
    StatePublished - 1993

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Control and Optimization
    • Applied Mathematics

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