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Beliefs asymmetry and price stability in a cobweb model

Berardi, Michele (2021): Beliefs asymmetry and price stability in a cobweb model.

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Abstract

This work analyses the role of asymmetry in beliefs for price dynamics in a cobweb model with heterogeneous expectations and evolutionary selection of predictors. While heterogeneous but symmetric beliefs result in the rational expectations equilibrium price, the effect of asymmetry depends on whether predictors on one side or the other of rationality have a larger support. A support skewed towards predictors that are anchored to past prices can be destabilizing, and the interaction with the evolutionary selection mechanism can lead to complex dynamics in prices; a support skewed towards predictors that overshoot price changes leads instead to price stability, irrespective of the underlying evolutionary dynamics. The design of the set of beliefs allowed to compete on the market is thus crucial for the possible outcomes of the model. One could interpret a skewed support in terms of sentiments, intended as one-sided systematic biases in expectations.

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