Learning Benevolent Leadership in a Heterogenous Agents Economy

Abstract : This paper studies the potential commitment value of cheap talk
inflation announcements in an agent-based dynamic extension of the
Kydland-Prescott model. In every period, the policy maker makes
a non-binding inflation announcement before setting the actual
inflation rate. It updates its decisions using individual evolutionary
learning. The private agents can choose between two different
forecasting strategies: They can either set their forecast equal to
the announcement or compute it, at a cost, using an adaptive learning
scheme. They switch between these two strategies as a function of
information about the associated payoffs they obtain through
word-of-mouth, choosing always the currently most favorable one.We
show that the policy maker is able to sustain a situation with a
positive but fluctuating fraction of believers. This equilibrium is
Pareto superior to the outcome predicted by standard theory. The
influence of changes in key parameters and the impact of transmission
of information among nonbelievers on the dynamics are studied.
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Submitted on : Tuesday, November 18, 2008 - 5:56:14 PM
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Jasmina Arifovic, Herbert Dawid, Christophe Deissenberg, Olena Kostyshyna. Learning Benevolent Leadership in a Heterogenous Agents Economy. 2008. ⟨halshs-00339761⟩

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