International College of Economics and Finance

ICEF Job Market Seminar by Runjie Geng (PhD from University of Zurich)

On Thursday, January 30 ICEF held the Job Market Seminar.
Speaker: Runjie Geng (PhD from University of Zurich)
Theme: "Recursive Equilibria in Dynamic Economies with Bounded Rationality".

Abstract: This paper provides a general framework to model bounded rationality in dynamic stochastic general equilibrium models with infinitely lived heterogeneous agents. A boundedly rational agent is associated with an information set I and an extra parameter epsilon, which can be interpreted as the “level of irrationality”. To make decisions, the boundedly rational agent forms a belief of a stationary joint distribution of the exogenous and endogenous variables and uses the marginal distribution (conditional on I ) to form forecasts. If the equilibrium distribution stays within epsilon of the forecasted next period distribution, the agent would consider it as epsilon-stationary. In equilibrium, each agent maximizes utility with an epsilon-stationary belief and markets clear. The main theorem of this paper shows that for any strictly positive epsilon, a recursive equilibrium exists. With a quantifiable ``level of irrationality'', the model incorporates many behavioral economics models as well as rational-expectations models with computational approximations into a unified framework. An illustration example is presented to show that the boundedly rational recursive equilibrium may substantially enrich the asset pricing dynamics of the rational-expectations model even for small epsilon.

ICEF seminar