Heterogeneity and evolution of expectations in a model of currency crisis.
A simple model of a portfolio allocation between mature and emerging markets is specified. The representative-agent, rational expectations version of the model has an unlimited number of equilibria, providing no reason to expect that heterogeneous agents would all coordinate on one or another equilibrium. Therefore, the model is simulated with heterogeneous expectations based on ex post returns, imitation, and experimentation. Solutions produce periodic crises, as periods of excessive optimism plant the seed for their reversal, despite the fact that interest rates fall before crises, instead of rising.
Arifovic
Jasmina
J
Department of Economics, Simon Fraser University, Burnaby, British Columbia V5A 1S6, CANADA.
Masson
Paul
P