Subjective temporary equilibrium

Publication Type

Journal Article

Publication Date

7-2004

Abstract

This paper introduces, within the framework of a simple example, the notion of a subjective temporary equilibrium. The underlying relation linking forecasts to equilibrium values of the state variable is linear. However, agents perceive a non-linear law that governs the rate of adjustment between successive periods and forecast using linear approximations to the non-linear law of motion. This is shown to generate a non-linear law of motion for the state variable with the feature that the agent's model describes correctly the period wise evolution of the economy. The resulting non-linear law of motion is referred to as a subjective temporary equilibrium as its specification is determined largely by the subjective beliefs of the agents regarding the dynamics of the system. lit a subjective equilibrium, agents forecasts are generated by taking linear approximations to a correctly specified law of motion and the forecasts may accordingly be interpreted as being boundedly rational in a first-order sense. There exist specifications that admit the possibility of cyclical behaviour.

Keywords

temporary equilibrium, bounded rationality, endogenous fluctuations

Discipline

Economic Theory

Research Areas

Economic Theory

Publication

Journal of Economic Dynamics and Control

Volume

28

Issue

9

First Page

1757

Last Page

1780

ISSN

0165-1889

Identifier

10.1016/j.jedc.2003.04.005

Publisher

Elsevier

Additional URL

https://doi.org/10.1016/j.jedc.2003.04.005

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