Learning benevolent leadership in a heterogenous agents economy

Abstract

JEL classification: C69 D83 E5 Keywords:Time inconsistency Bounded rationality Forecast and agent heterogeneity Cheap talk Evolutionary learning a b s t r a c t This paper studies the potential commitment value of cheap talk announcements in an agent-based dynamic extension of the Kydland-Prescott model. In every period, the policy maker makes a non-binding inflation announcement before setting the actual inflation rate. It updates its decisions using individual evolutionary learning. The private agents can choose between two different forecasting strategies: They can either set their forecast equal to the announcement or use an adaptive learning scheme to (potentially) forecast the true inflation. They switch between these two strategies as a function of information about the associated payoffs they obtain through word-ofmouth, choosing always the currently most favorable one. While all agents using the first strategy make the same forecast, those using the second strategy may generate different individual forecasts.In spite of the complexity of the environment, the boundedly rational policy maker learns to sustain a situation with a positive but fluctuating fraction of believers. This outcome is Pareto superior to the outcome predicted by standard theory. Interestingly enough, the actions taken by the policy maker undergo marked qualitative changes as a function of the prevailing heterogeneity among and learning characteristics of the private agents.

How transparent about its inflation target should a central bank be?

“…See also Arifovic et al (2010) for a private inflation expectations formation process that is partially based on adaptive learning and takes the announcement of an inflation target by the central bank into account. 12 See De Grauwe (2011) for a comparable mechanism of the target, because they do not know it.…”

Macroeconomic Policy in DSGE and Agent-Based Models Redux: New Developments and Challenges Ahead

“…Moreover, the Taylor principle does not hold and the adaptive rule outperforms the commitment one according to the standard loss function criterium. Relatedly, Arifovic et al (2010) study the time-inconsistency problem face by Central Banks in an ABM where the interaction between a boundedly-rational, evolutionary learning policy maker and a population of heterogenous agents determines the actual inflation rate. The agents can either believe the inflation rate announced by the Central Bank or employ an adaptive learning scheme to forecast future inflation.…”

Conquering Credibility for Monetary Policy under Sticky Confidence

“…While De Grauwe (2011) formulates an extended three-equation model generating endogenous and self-fulfilling waves of optimism and pessimism, the model of this paper explores whether there is convergence towards an equilibrium consistent with the price level targeted by policy makers when private decision makers switch between forecasting heuristics based on evolutionary dynamics. This paper is also related to Arifovic, Dawid, Deissenberg, and Kostyshyna (2010), who investigate the role of announcements by the policy maker as a means to sustain a Pareto superior macroeconomic outcome. Each private agent can choose in any period between two strategies: believe, that is, act as if the policy announcement was true; or not believe, and compute the best possible forecast of the policy maker's next action.…”