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LCN2 Seminar: Complexity in Economics and Finance

Prof. Cees Diks from the University of Amsterdam will give an LCN2 seminar on April 28th at 16:00 in the Science Club, titled 'Complexity in Economics and Finance'.

We discuss how expectations feedback and heterogeneity among agents can generate complex dynamics in economic and financial systems. The qualitative predictions of the resulting nonlinear models are very different from standard linear benchmarks, with important policy implications. For instance, the fundamental price can become unstable when interest rates are set too low, giving rise to multiple non-fundamental equilibria and/or global instability. This is illustrated in a central application, where we introduce heterogeneous expectations in a standard housing market model linking housing rental levels to fundamental buying prices. Using quarterly data we estimate the model parameters for eight different OECD countries. We find that the data support heterogeneity in expectations, with temporary endogenous switching between fundamental mean-reverting and trend-following beliefs based on their relative performance. Finally, a stochastic CUSP model is estimated for the same housing data to study the effect of time-varying mortgage rates in a stochastic setting.

Publ. 26-04-2017 11:55
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