Coexistence of Perfect and Non-Perfect Foresight Cycles in a Bounded Rationality Economy

Gian-Italo Bischi - University of Urbino and Laura Gardini - University of Brescia and University of Urbino

We show that forward-looking economic models are characterized by non perfect foresight cycles under bounded rationality. We study forward-looking models assuming that the agents take one step ahead expectations looking back of k time periods. The dynamics of the economy with this expectation function is characterized by non perfect foresight cycles. The stability of these periodic solutions under bounded rationality is related to the stability of the perfect foresight cycles. Two examples are analyzed: a pure exchange overlapping generations economy with a law of motion described by the logistic map and an economy with production and increasing returns with multiple perfect foresight stationary equilibria.

Scheduled for Session 3.3 Learning