TY - JOUR
T1 - Misperception-driven chaos
T2 - Theory and policy implications
AU - Yokoo, Masanori
AU - Ishida, Junichiro
N1 - Funding Information:
The authors appreciate Akio Matsumoto, Cars Hommes (the co-editor) and three anonymous referees for helpful comments that substantially improved the paper. The authors are also grateful to seminar participants at the Third International Conference on Discrete Chaotic Dynamics in Nature and Society (DCDNS3), Ritsumeikan University, Osaka University, Chuo University, and Aomori Public College. All remaining errors are our own. The first author acknowledges financial support from the Japanese Ministry of Education, Culture, Sports, Science and Technology (Grants-in-Aid for Young Scientists (B), 17730134, 2005).
PY - 2008/6
Y1 - 2008/6
N2 - In a large economy, it is extremely difficult, if not impossible, to immediately grasp the state of our surrounding environment with precision since we normally have access only to a subset of relevant information. In this paper, we introduce this information imperfection into an ordinary model of endogenous business cycles and examine how it would affect the dynamic nature of the model. We, in particular, present a mechanism by which observation errors result in chaotic fluctuations in a model that would behave regularly otherwise, thereby indicating the importance of potential misperception about the current state in a qualitative sense. Also, our model is tractable enough to explicitly derive a policy index of chaotic fluctuations under some conditions. This feature of the model allows us to draw some policy implications regarding the observability of macroeconomic state variables.
AB - In a large economy, it is extremely difficult, if not impossible, to immediately grasp the state of our surrounding environment with precision since we normally have access only to a subset of relevant information. In this paper, we introduce this information imperfection into an ordinary model of endogenous business cycles and examine how it would affect the dynamic nature of the model. We, in particular, present a mechanism by which observation errors result in chaotic fluctuations in a model that would behave regularly otherwise, thereby indicating the importance of potential misperception about the current state in a qualitative sense. Also, our model is tractable enough to explicitly derive a policy index of chaotic fluctuations under some conditions. This feature of the model allows us to draw some policy implications regarding the observability of macroeconomic state variables.
KW - Business cycle
KW - Chaos
KW - Heterogeneity
KW - Observation errors
KW - Policy implications
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U2 - 10.1016/j.jedc.2007.06.013
DO - 10.1016/j.jedc.2007.06.013
M3 - Article
AN - SCOPUS:43849092769
SN - 0165-1889
VL - 32
SP - 1732
EP - 1753
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
IS - 6
ER -