Heterogeneous expectations and equilibria selection in an evolutionary overlapping generations model

Abstract

The way agents form their expectations, and which equilibria are consequently selected, are issues that come over macroeconomic growth models that study the transition between states characterized by different levels of capital. Existing theoretical works in this area have been mostly dominated by perfect foresight models although alternative expectations schemes have been proposed in the last decades. In the present paper we propose an OLG model with capital accumulation assuming that agents employ simple yet heterogeneous rules to forecast the future course of the interest rate and the real wage. The forecasting rules are selected according to an evolutionary mechanism that, on the basis of a fitness measure, evaluates the performance of the heuristics agents are currently adopting. We analytically show that, in the heterogeneous setting we consider, multiple equilibria are possible, but the evolutionary heuristic switching allows for a decrease in the number of possible steady states, drives their selection, and reduces the actual possibility that the economy might be locked into a poverty trap.