Open AccessSTABILITY OF THE PRICE REACTION FUNCTION WHEN THE CONSUMERS ANTICIPATE FUTURE PRICES
Author(s) -
Wirl Franz
Publication year - 1993
Publication title -
natural resource modeling
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.28
H-Index - 32
eISSN - 1939-7445
pISSN - 0890-8575
DOI - 10.1111/j.1939-7445.1993.tb00144.x
Subject(s) - economics , rational expectations , futures studies , volatility (finance) , function (biology) , microeconomics , econometrics , stability (learning theory) , mathematical economics , computer science , evolutionary biology , artificial intelligence , machine learning , biology
The hypothesis of the price reaction function‐prices change in dependence of capacity utilization‐is frequently applied to model OPEC's response to world oil market conditions. These studies assume implicitly myopic consumer behavior, or more bluntly, only the “experts” know this model but not the consumers. This paper extends the analysis to rational expectations (more precisely, perfect foresight due to a deterministic framework) and proves the (saddlepoint) stability of the equilibrium. Numerical examples highlight the differences of the two hypotheses, myopic versus rational consumer expectations. In particular, damped oscillations result for the empirical application (larger and more persistent for myopic consumers), which explains past volatility.