Hacıoğlu, Volkan (2015): Bayesian Expectations and Strategic Complementarity: Implications for Macroeconomic Stability. Published in: Procedia  Social and Behavioral Sciences , Vol. 195, (3 July 2015): pp. 580291.

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Abstract
This paper examines the heterogeneous market in which economic agents of different informationprocessing abilities interact. In the theoretical framework, the market is composed of three different types of agents, “sophisticated” agents with rational expectations, “naive” agents with adaptive expectations, and Bayesian agents endowed with learning abilities. The behavior of these agents in the context of an important economic problem of nominal price adjustment after a fully anticipated onetime negative monetary shock is examined. If sophisticated agents with their perfect foresight find it profitable to imitate the biased behavior of naive agents, then the interaction of agents exhibits strategic complementarity. Thus the naive agents will have a disproportionately large effect on sluggish price adjustment towards equilibrium. However, the introduction of Bayesian agents with learning abilities into the market will have a compensatory effect by mitigating the price rigidity. Since Bayesian learning is allowed in heterogeneous market, Bayesian agents that first start as naive will undergo a learning process to become sophisticated after a certain period. In conclusion, the proportion of naive agents decreases in favor of sophisticated agents as depicted in the simulation model. As a result, the price adaptation towards equilibrium is accellerated.
Item Type:  MPRA Paper 

Original Title:  Bayesian Expectations and Strategic Complementarity: Implications for Macroeconomic Stability 
Language:  English 
Keywords:  nominal inertia; strategic complements; behavioral dynamics; heterogeneous expectations; Bayesian learning 
Subjects:  E  Macroeconomics and Monetary Economics > E3  Prices, Business Fluctuations, and Cycles > E37  Forecasting and Simulation: Models and Applications 
Item ID:  75397 
Depositing User:  Dr. Volkan Hacıoğlu 
Date Deposited:  03 Dec 2016 13:18 
Last Modified:  04 Oct 2019 16:23 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/75397 