Beyond the Great Moderation: The Impact of Heterogeneous Expectations on Business Cycle Fluctuations

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Metzler’s model is an important contribution to our understanding of the dynamics of business cycles. In his model, the production of consumption goods depends on expected future sales. However, Metzler assumes that producers are homogeneous and follow a simple expectation formation rule. Taking into account that in reality producers might not only follow several expectation formation rules but also even switch between them, we reformulate Metzler’s original model. As it turns out, endogenous business cycles may emerge within our model, i.e. changes in production and inventory are (quasi-)periodic for certain parameter combinations.

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Michael Wegener

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bounded rationality business cycle fluctuation heterogenous expectation

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