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
Citation
CHATTERJI, Shurojit.
Subjective temporary equilibrium. (2004). Journal of Economic Dynamics and Control. 28, (9), 1757-1780.
Available at: https://ink.library.smu.edu.sg/soe_research/1884
Additional URL
https://doi.org/10.1016/j.jedc.2003.04.005