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HEURISTIC EXPECTATION FORMATION AND BUSINESS CYCLES: A SIMPLE LINEAR MODEL
Author(s) -
Westerhoff Frank H.
Publication year - 2008
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.2007.00290.x
Subject(s) - business cycle , economics , rational expectations , simple (philosophy) , econometrics , multiplier (economics) , heuristic , keynesian economics , microeconomics , macroeconomics , mathematical economics , mathematics , mathematical optimization , philosophy , epistemology
We develop a Keynesian business cycle model to study how extrapolative and regressive expectation formation rules may affect fluctuations in economic activity. We find that simple expectation formation rules may have an impact on the level and the stability of the equilibrium income, the size of the multiplier and the resulting adjustment process after an exogenous shocks. Our model also reveals that national income may be influenced by how agents perceive their long‐run average income.