Heterogeneity of expectations and financial crises: a stochastic dynamic approach

Heterogeneity of expectations and financial crises: a stochastic dynamic approach This study provides a heterogeneous agent-based microfoundation to the concept of “liquidity trap” with a binary choice model, in which an economic agent stochastically changes her decisions. The transition rates from one state to the other vary, depending on the degree of diversity in expectations. Applying this model to the money/bond choice, this study seeks to derive the money demand function proposed by Keynes and analyze how the heterogeneity of expectations affects it. The model demonstrates that money holding becomes relatively advantageous as the proportion of money holders increases and that such a situation could bring about multiple equilibria. Through comparative statics, this study finds that the heterogeneity of expectations plays a crucial role for existence of multiple equilibria. Demonstrating that a financial crisis is a leap from one equilibrium to the other, the model helps to explain the recent crisis and offers practical implications for monetary policies. In particular, in analyzing the influences of heterogeneous expectations on the economy, this study uncovered an interesting fact that unconventional monetary policies work better than conventional ones in fighting against crises induced by a flight to liquidity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Interaction and Coordination Springer Journals

Heterogeneity of expectations and financial crises: a stochastic dynamic approach

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Publisher
Springer Berlin Heidelberg
Copyright
Copyright © 2016 by Springer-Verlag Berlin Heidelberg
Subject
Economics; Economic Theory/Quantitative Economics/Mathematical Methods; Computer Appl. in Social and Behavioral Sciences; Theoretical, Mathematical and Computational Physics; Finance, general
ISSN
1860-711X
eISSN
1860-7128
D.O.I.
10.1007/s11403-016-0175-y
Publisher site
See Article on Publisher Site

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