Behavioural & Experimental Macroeconomics: Some Recent Findings

Transcription

1 Behavioural & Experimental Macroeconomics: Some Recent Findings Cars Hommes CeNDEF, University of Amsterdam MACFINROBODS Conference Goethe University, Frankfurt, Germany 3-4 April 27 Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS / 33

2 Introduction Why Macro Experiments? If a theory does not work in a (simple) controlled laboratory environment with human subjects, why would it work in reality? a macro experiment studies group behaviour in a (simple) complex system in the lab, where aggregate behaviour depends on individual interactions in a macro experiment we study individual (micro) as well as the emerging aggregate (macro) behavior in controlled laboratory environment empirical foundation for individual decision rules for agent-based models (ABMs) to discipline wilderness of bounded rationality laboratory test for policy analysis to test policies in more realistic controlled lab macro environment Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 2 / 33

3 Introduction The Economy as an Expectations Feedback System beliefs/expectations realizations mapping from all heterogeneous beliefs to price realizations p t = F (p e,t+, p e 2,t+, p e H,t+) simple mapping from average beliefs into price realizations p t = f( H p e h,t+) = f(p e t+ H ) h= rational solution: beliefs on average equal to realizations p = f(p ): perfectly self-fulfilling expectations Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 3 / 33

4 Introduction What is a Learning to Forecasts Experiment (LtF)? individuals only have to forecast prices, ceteris paribus, with all other behavior computerized by theory price depends on average forecast: p t = f( p e t+) positive feedback: f is increasing negative feedback: f is decreasing Number prediction 9 real number Round Round Prediction Real value 33,7 5, ,7 56, , 65,32 4 4, 65, 5 43,5 66,2 6 5, 64, ,35 58, ,7 42,35 9 3, 4, 28,25 Total Earnings Remaining earnings: this period: time: What is your prediction this period? Your prediction must be between and Prediction: Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 4 / 33

5 Introduction What is a Learning-to-Forecast Experiment (LtFE)? Lab Experimental test of expectations hypothesis with group of subjects expectations are the only degree of freedom consumption, production, trading is computerized (consistent with optimal rational behaviour) within a benchmark model/framework cobweb model asset pricing model New Keynesian macro model housing market model OLG model advantage: clean data on expectations Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 5 / 33

6 Introduction Questions and Challenges Key Questions: Which forecasting rules do individuals use? Are expectations heterogeneous or do individuals coordinate? On what does a collection of individuals coordinate? Coordination on RE or learning equilibrium? How does this depend on the model/framework How can policy affect micro and emerging macro behavior? Challenge: universal theory of heterogeneous expectations Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 6 / 33

7 Introduction Subjects task and Information Subjects task and incentive (professional forecasters) forecasting a price for 5 periods better forecasts yield higher earnings Subjects know only qualitative information about the market price p t derived from equilibrium between demand and supply type of expectations feedback: positive or negative past information: at time t participant h can see past prices (up to p t ), own past forecasts (up to p t,h ) and own earnings (up to e t,h ) Subjects do not know exact equilibrium equation, e.g. p t = f( p e t+) or p t = f( p e t ) exact demand schedule of themselves and others number and forecasts of other participants Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 7 / 33

8 Introduction Example Computer Screen Experiment Number 9 prediction real number Round Round Prediction Real value 33,7 5, ,7 56, , 65,32 4 4, 65, 5 43,5 66,2 6 5, 64, ,35 58, ,7 42,35 9 3, 4, 28,25 Total Earnings Remaining earnings: this period: time: What is your prediction this period? Your prediction must be between and Prediction: Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 8 / 33

9 Introduction Outline Introduction 2 Behavioral Heuristic Switching Model 3 Positive versus Negative Feedback 4 NK Macro Model 5 Simple Forecasting Heuristics that make us smart 6 Conclusions and Future Outlook Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 9 / 33

10 Introduction References Hommes, C.H., (2), The heterogeneous expectations hypothesis: some evidence from the lab, Journal of Economic Dynamics and Control 35, -24. Assenza, T., Bao, T., Hommes, C.H. and Massaro, D. (24), Experiments on expectations in macroeconomics and finance, In: Duffy, J. (Eds.), Research in Experimental Economics, Vol. 7, Emerald Press, Bingley, pp.-7. Anufriev, M. and Hommes, C.H. (22), Evolutionary selection of individual expectations and aggregate outcomes, American Economic Journal-Micro 4 (4), Assenza, T., Heemeijer, P., Hommes, C.H. and Massaro (24), Managing self-organization of expectations through monetary policy: a macro experiment, October 24. Bao, T. Hommes, C.H. and Makarewicz, T. (27), Simple forecasting heuristics that make us smart: evidence from different market exeriments, University of Amsterdam. Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS / 33

11 Behavioral Heuristic Switching Model Outline Introduction 2 Behavioral Heuristic Switching Model 3 Positive versus Negative Feedback 4 NK Macro Model 5 Simple Forecasting Heuristics that make us smart 6 Conclusions and Future Outlook Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS / 33

12 Behavioral Heuristic Switching Model Heuristics Switching Model Brock and Hommes, 997; Anufriev and Hommes, AEJ:Micro 22 agents choose from a number of simple forecasting heuristics performance based reinforcement learning: agents evaluate the performances of all heuristics, and tend to switch to more successful rules; fractions of belief types are gradually updated in each period: (discrete choice model with asynchronous updating) n ht = δn h,t + ( δ) eβu h,t Z t where Z t is normalization factor. U ht fitness measure (e.g. realized profits) β is intensity of choice. δ asynchronous updating Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 2 / 33

13 Behavioral Heuristic Switching Model Heuristic Switching Model: four forecasting heuristics Anufriev and Hommes, AEJ:Micro 22 adaptive expectations rule, [w =.65] ADA p e,t+ =.65 p t +.35 p e,t weak trend-following rule, [γ =.4] WTR p e 2,t+ = p t +.4 (p t p t 2 ) strong trend-following rule, [γ =.3] STR p e 3,t+ = p t +.3 (p t p t 2 ) anchoring and adjustment heuristic with learnable anchor LAA p e ( ) 4,t+ = 2 p av t + p t + (pt p t 2 ) Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 3 / 33

14 Behavioral Heuristic Switching Model Switching Model fitted to Experimental Data 65 Group 5 65 Group 6 75 Group 7 65 Price 55 Price 55 Price simulation experiment ADA WTR STR LAA simulation experiment ADA WTR STR LAA simulation experiment ADA WTR STR LAA 65 Predictions Predictions Predictions Fractions of 4 rules in the simulation for Group 5 Fractions of 4 rules in the simulation for Group 2 Fractions of 4 rules in the simulation for Group 7 ADA WTR STR LAA ADA WTR STR LAA ADA WTR STR LAA Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 4 / 33

15 Positive versus Negative Feedback Outline Introduction 2 Behavioral Heuristic Switching Model 3 Positive versus Negative Feedback 4 NK Macro Model 5 Simple Forecasting Heuristics that make us smart 6 Conclusions and Future Outlook Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 5 / 33

16 Positive versus Negative Feedback Positive versus Negative Feedback Experiments Heemeijer et al. (JEDC 29); Bao et al. (JEDC 22) negative feedback (strategic substitute environment) p t = [ 6 pe ht ] 6] + ɛ t h= positive feedback (strategic complementarity environment) p t = [ 6 pe ht 6] + ɛ t h= common feature: same RE equilibrium 6 only difference: sign in the slope of linear map +.95 vs.95 Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 6 / 33

17 Positive versus Negative Feedback Negative vs. Positive Feedback Experiments Prices, Individual Predictions and Errors; (Heemeijer et al., JEDC 29) 8 NEGATIVE 8 POSITIVE Price 6 4 Price 6 4 Predictions Predictions Positive Feedback: coordination on wrong non-re price; coordination on almost self-fulfilling equilibria Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 7 / 33

18 Positive versus Negative Feedback Prices in Experiments with Positive/Negative Feedback (7/6 groups) negative feedback positive feedback 8 8 Price 6 4 Price Time convergence to RE Time almost self-fulfilling equilibria Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 8 / 33

19 Positive versus Negative Feedback Positive vs Negative Feedback; Small Shocks Heuristics Switching Model Simulations prices strategy frequencies Price Impacts of Heuristics simulation experiment ADA WTR STR LAA Price Impacts of Heuristics simulation experiment ADA WTR STR LAA positive feedback: trend-followers amplify fluctuations Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 9 / 33

20 NK Macro Model Outline Introduction 2 Behavioral Heuristic Switching Model 3 Positive versus Negative Feedback 4 NK Macro Model 5 Simple Forecasting Heuristics that make us smart 6 Conclusions and Future Outlook Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 2 / 33

21 NK Macro Model A Monetary Economy with Nominal Rigidities Standard model for monetary policy analysis y t = y e t+ ϕ(i t π e t+) + ɛ t output π t = λy t + βπ e t+ + υ t inflation i t = Max{π + φ π (π t π), } monetary policy rule Complication: the standard forward looking New Keynesian model requires agents to forecast two variables! Experimental desigh: two different groups of forecasters inflation and output gap to limit cognitive efforts Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 2 / 33

22 NK Macro Model Screenshot Experiment Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 22 / 33

23 NK Macro Model Experimental Results Three Treatments: (a) inflation target π = 2 and weak Taylor rule (φ π = ); (b) inflation target π = 2 and aggressive Taylor rule (φ π =.5); (c) inflation target π = 3.5 and aggressive Taylor rule (φ π =.5). Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 23 / 33

24 NK Macro Model Summary of the Experimental Results Four Different Types of Aggregate Behavior emerging through Coordination of Individual Expectations coordination of individual expectations not perfect, some heterogeneity persists weak Taylor rule (φ π = ): unstable dynamics convergence to some non-fundamental steady states exploding inflation-output dynamics, either increasing or decreasing aggressive Taylor rule (φ π =.5): stable dynamics fast or slow oscillatory convergence permanent oscillations if target inflation π = 3.5 Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 24 / 33

25 NK Macro Model Heuristics Switching Model Pool of heuristics whose impacts are changing over time according to past relative performance U h,t = + x t x e h,t + ηu h,t 2 Discrete choice model with asynchronous updating n h,t = δn h,t + ( δ) exp(βu h,t ) Z t Set of four heuristics ADA π,t+ e =.65π t +.35π,t WTF π2,t+ e = π t +.4(π t π t 2 ) STF π3,t+ e = π t +.3(π t π t 2 ) LAA π4,t+ e =.5(πt av + π t ) + (π t π t 2 ) Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 25 / 33

26 NK Macro Model Coordination on explosive behavior( π = 2, φ π = ; Tra, gr5) through coordination on strong trend-following rule Treatment a, group experiment Predictions of participants, treatment a, group 5 Predictions of 4 rules, treatment a, group simulation ADA WTF STF LAA ACF inflation, treatment a, group 5 experiment Impact of 4 rules (inflation), treatment a, group 5 Impact of 4 rules (output gap), treatment a, group 5.5 simulation.9 ADA WTF STF LAA.9 ADA WTF STF LAA ACF output gap, treatment a, group Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 26 / 33

27 NK Macro Model Coordination dampened oscillations ( π = 2, φ π =.5; Trb, gr2) through switching from trend-following to adaptive expectations Treatment b, group experiment Predictions of participants, treatment b, group 2 Predictions of 4 rules, treatment b, group simulation ADA WTF STF LAA ACF inflation, treatment b, group 2 experiment Impact of 4 rules (inflation), treatment b, group 2 Impact of 4 rules (output gap), treatment b, group 2.5 simulation.9 ADA WTF STF LAA.9 ADA WTF STF LAA ACF output gap, treatment b, group Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 27 / 33

28 NK Macro Model Summary Four Different Types of Aggregate Behavior emerging through Coordination of Individual Expectations convergence to some non-fundamental steady states through coordination on adaptive expectations; exploding dynamics inflationary/deflationary spirals, through coordination on strong trend-following behavior dampened oscillations through switching form trend-following to adaptive expectations persistent oscillations through coordination on LAA rule How can monetary policy affect the aggregate behavior? Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 28 / 33

29 NK Macro Model Monetary Policy and Macroeconomic Stability Taylor rules targeting inflation: i t = π + φ π(π t π)[+φ y(y t y)] New Keynesian DSGE Model: (π t, y t ) = F ( π e t+, ȳe t+ ) absolute value of eigenvalues of linear map ΦΠ ΦΠ managing trend-following behavior: increase φ π to add negative feedback s.t. the macroeconomy becomes sufficiently stable to prevent survival of trend-following strategies Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 29 / 33

30 Simple Forecasting Heuristics that make us smart Outline Introduction 2 Behavioral Heuristic Switching Model 3 Positive versus Negative Feedback 4 NK Macro Model 5 Simple Forecasting Heuristics that make us smart 6 Conclusions and Future Outlook Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 3 / 33

31 Conclusions and Future Outlook Outline Introduction 2 Behavioral Heuristic Switching Model 3 Positive versus Negative Feedback 4 NK Macro Model 5 Simple Forecasting Heuristics that make us smart 6 Conclusions and Future Outlook Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 3 / 33

32 Conclusions and Future Outlook Conclusions LtF Experiments in positive feedback markets coordination on trend-extrapolating rules may lead to large bubbles and crashes. weakening the positive feedback stabilizes markets bubbles are robust in larger groups (H=3, ) the behavioral heuristic switching model (HSM) provides a good (universal) description of the experimental data at the individual as well as the aggregate level Question: where do the (4) rules in the HSM come from? GA-model with learning of smart first-order heuristic Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 32 / 33

33 Conclusions and Future Outlook Concluding Remarks More (large scale) experiments are needed for empirical validation of macro behaviour Policy analysis needs to be based on empirically relevant behavioural models Thank you very much! Cars Hommes (CeNDEF, UvA) Behavioral Macro MACFINROBODS 33 / 33