Interactive expectations

In modeling expectation formation, economic agents are usually viewed as forming expectations adaptively or in accordance with some rationality postulate. We offer an alternative nonlinear model where agents exchange their opinions and information with each other. Such a model yields multiple equilibria, or attracting distributions, that are persistent but subject to sudden large jumps. Using German Federal Statistical Office economic indicators and German IFO Poll expectational data, we show that this kind of model performs well in simulation experiments. Focusing upon producers' expectations in the consumption goods sector, we also discover evidence that structural change in the interactive process occurred over the period of investigation (1970–1998). Specifically, interactions in expectation formation seem to have become less important over time. RID="*" ID="*"We would like to thank Ulrich Witt, Director of the Evolutionary Economics Unit, The Max Planck Institute for Research into Economic Systems, Jena, Germany, for providing the intellectual stimulus for this project and arranging the necessary financial support from the Max Planck Society to facilitate our collaboration. Thanks are also due to the IFO Institute for providing the data for this study. However, the usual caveat applies.