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HETEROGENEOUS EXPECTATIONS AND ENDOGENOUS FLUCTUATIONS IN THE FINANCIAL ACCELERATOR FRAMEWORK

Published online by Cambridge University Press:  01 June 2018

Davide Bazzana
Davide Bazzana*
Affiliation:
University of Brescia
*
Address correspondence to: Davide Bazzana, Department of Economics and Management, University of Brescia, Via San Faustino, 74/b, 25122Brescia, Italy; e-mail: davide.bazzana@unibs.it.
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Abstract

This paper proposes a financial accelerator framework to study the effects of heterogeneous and bounded rational expectations on macroeconomic dynamics. The paper examines the fluctuations effects departing from the rational expectations hypothesis in order to understand if there are significant implications on macroeconomic volatility and policy prescriptions. The findings suggest that macroeconomic stability and inflation dynamics depend on the chosen set of forecasting rules, as well as on the monetary policy adopted. The model shows that no monetary policy is able to quickly stabilize the system, as some fluctuations persist. Central banks face a trade-off between macro-volatility and speed of convergence to the steady state. This result offers some ground for fiscal policies aiming to prompt system stability. In addition, the analysis reveals a counterintuitive result confirming the “less-is-more” effect: increasing the decision-making and computational abilities of the agents may not lead the system to converge to the preferable steady state.

Keywords

Heterogeneous ExpectationsFinancial AcceleratorMonetary PolicyBusiness Fluctuations
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 2 , March 2020 , pp. 327 - 359
Copyright
© Cambridge University Press 2018

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Footnotes

This paper has benefited from comments and suggestions by Domenico Delli Gatti, Cars Hommes and Domenico Massaro. I would like to show my gratitude to Matilde Zubani for her valuable help in language revision and submission of the manuscript. Finally, I wish to thank the Associate Editor and the anonymous referees for their detailed suggestions.

References

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