Heterogeneous expectations and debt in a growth model for a small open economy |
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Authors: | Michael Wegener |
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Affiliation: | 1. Department of Economics, University of Bamberg, 96045, Bamberg, Germany
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Abstract: | We extend an aggregative growth model for a small open economy by developing a framework in which boundedly rational agents raise credit in proportion to their expected income. Moreover, these agents are heterogeneous in the sense that they switch between an extrapolative and a regressive forecasting rule with respect to perceived market circumstances. Using a mixture of analytical and numerical tools, we attempt to describe the characteristics of our model’s dynamical system. Our results then suggest that self-fulfilling short-run expectations do not only have important consequences for fluctuations in economic activity but are also a source of simple endogenous dynamics. |
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