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Can Social Interaction Based Expectations Create the Characteristics of the Business Cycle?

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  3. Applied Economics Quarterly
  4. Vol. 64, Issue 4
  5. pp. 325–350

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Kaiser, T. Can Social Interaction Based Expectations Create the Characteristics of the Business Cycle?. Applied Economics Quarterly, 64(4), 325-350. https://doi.org/10.3790/aeq.64.4.325
Kaiser, Timo Pascal "Can Social Interaction Based Expectations Create the Characteristics of the Business Cycle?" Applied Economics Quarterly 64.4, , 325-350. https://doi.org/10.3790/aeq.64.4.325
Kaiser, Timo Pascal: Can Social Interaction Based Expectations Create the Characteristics of the Business Cycle?, in: Applied Economics Quarterly, vol. 64, iss. 4, 325-350, [online] https://doi.org/10.3790/aeq.64.4.325
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Can Social Interaction Based Expectations Create the Characteristics of the Business Cycle?

Kaiser, Timo Pascal

Applied Economics Quarterly, Vol. 64 (2018), Iss. 4 : pp. 325–350

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/aeq.64.4.325
Language
English
Pages
26

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Author Details

Timo Pascal Kaiser, Pforzheim University, Tiefenbronner Str. 65, 75175 Pforzheim, Germany.

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Abstract

Abstract

This paper introduces social-interaction based expectations in a New Keynesian frame and compares the characteristics with that of the standard rational expectation model. Agents in this model are connected with each other and build their rational expectation on their neighborhood’s opinions and recent economic developments. Instead of precise forecast they use rule of thumbs which reflect whether they assume a positive or a negative future. As result an endogenous business cycle arises. The autocorrelation of the output gap is much larger than in a model with rational expectation and two-way causality from output gap to expectation about output gap arises while kurtosis decreases and correlation between inflation and output gap is quite negative. The use of different networks changes the characteristics of the model. Situations where people trust much more their social network than economic developments can lead to continual recession, boom, inflation or deflation.

JEL classifications: E10, E32, E71

Keywords: Rational expectations, non linear dynamics, animal spirit

Table of Contents

Section Title Page Action Price
Timo Pascal Kaiser: Can Social Interaction Based Expectations Create the Characteristics of the Business Cycle? 1
Abstract 1
1. Introduction 1
2. The New Keynesian Model 3
3. Expectations Formed by Social Interaction 4
3.1 Criticism on the Statements of Muth 4
3.2 Formal Description 5
3.2.1 Public Information 7
3.2.2 Network Information 7
4. Networks 8
4.1 Regular Networks 9
4.2 The Erdös-Renyi Random Network 9
4.3 The Small World Model of Watts and Strogatz 9
4.4 The Scale-free Model of Barabasi and Albert 9
4.5 The Assortative Mixing Model of Newman 1
5. Simulation 1
5.1 Business Cycles 1
5.2 The Persistence 1
5.3 Causality Between Expectation and Output Gap 1
5.4 Higher Moments 1
5.5 Correlation Between Output Gap and Inflation 1
6. Sensitivity 1
6.1 The Influence of X̂ and Π 1
6.2 The Influence of a and b 1
6.3 The Influence of the Shocks 1
7. Summary and Conclusion 1
References 1
A. Sensitivity 2
Table 2: Sensitivity: Autocorrelation 2
Table 3: Sensitivity: Correlation Between Inflation and Output Gap 2
Table 4: Sensitivity: P-value of Granger Causality from Expectation to the Output Gap 2
Table 5: Sensitivity: P-value of Granger Causality from Output Gap to Expectation 2
Table 6: Sensitivity: Kurtosis 2

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