Nonlinear Dynamics, Psychology, and Life Sciences, Vol. 8, Iss. 2, April, 2004, pp. 231-258
@2004 Society for Chaos Theory in Psychology & Life Sciences

 
 
 

Heterogeneity and Evolution of Expectations in a Model of Currency Crisis

Jasmina Arifovic, Simon Fraser University
Paul Masson, Brookings Institution, Washington, DC

Abstract: 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.

Keywords: currency crisis, expectations, heterogeneity, agents