### Abstract

The purpose of this paper is to develop a methodology which will use economic data to detect the existence of boundedly rational economic agents. The bounded rationality model presented in this paper generalizes a linear dynamic rational expectations model by nesting two types of expectations. In this paper, it is claimed that the bounded rationality model as presented can be transformed into an optimal regulator problem with distortions. As a result, the methodologies developed by the optimal control theory can be used to solve the model. The likelihood function for the model is constructed by the Kalman filtering using the solution of the model. Maximum Likelihood Estimation (MLE) is performed to test for bounded rationality in the U.S. cattle market for the period from 1900 to 1990. The empirical results indicate that some fraction of economic agents in the market are boundedly rational.

Original language | English |
---|---|

Pages (from-to) | 1517-1543 |

Number of pages | 27 |

Journal | Journal of Economic Dynamics and Control |

Volume | 23 |

Issue number | 9-10 |

Publication status | Published - 1999 Sep |

Externally published | Yes |

### Fingerprint

### Keywords

- Bounded rationality
- Heterogeneous expectations
- Kalman filtering
- Maximum likelihood estimation
- Optimal regulator problem with distortions

### ASJC Scopus subject areas

- Economics and Econometrics
- Control and Optimization

### Cite this

**Tests for bounded rationality with a linear dynamic model distorted by heterogeneous expectations.** / Baak, Saang Joon.

Research output: Contribution to journal › Article

*Journal of Economic Dynamics and Control*, vol. 23, no. 9-10, pp. 1517-1543.

}

TY - JOUR

T1 - Tests for bounded rationality with a linear dynamic model distorted by heterogeneous expectations

AU - Baak, Saang Joon

PY - 1999/9

Y1 - 1999/9

N2 - The purpose of this paper is to develop a methodology which will use economic data to detect the existence of boundedly rational economic agents. The bounded rationality model presented in this paper generalizes a linear dynamic rational expectations model by nesting two types of expectations. In this paper, it is claimed that the bounded rationality model as presented can be transformed into an optimal regulator problem with distortions. As a result, the methodologies developed by the optimal control theory can be used to solve the model. The likelihood function for the model is constructed by the Kalman filtering using the solution of the model. Maximum Likelihood Estimation (MLE) is performed to test for bounded rationality in the U.S. cattle market for the period from 1900 to 1990. The empirical results indicate that some fraction of economic agents in the market are boundedly rational.

AB - The purpose of this paper is to develop a methodology which will use economic data to detect the existence of boundedly rational economic agents. The bounded rationality model presented in this paper generalizes a linear dynamic rational expectations model by nesting two types of expectations. In this paper, it is claimed that the bounded rationality model as presented can be transformed into an optimal regulator problem with distortions. As a result, the methodologies developed by the optimal control theory can be used to solve the model. The likelihood function for the model is constructed by the Kalman filtering using the solution of the model. Maximum Likelihood Estimation (MLE) is performed to test for bounded rationality in the U.S. cattle market for the period from 1900 to 1990. The empirical results indicate that some fraction of economic agents in the market are boundedly rational.

KW - Bounded rationality

KW - Heterogeneous expectations

KW - Kalman filtering

KW - Maximum likelihood estimation

KW - Optimal regulator problem with distortions

UR - http://www.scopus.com/inward/record.url?scp=0033195761&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0033195761&partnerID=8YFLogxK

M3 - Article

AN - SCOPUS:0033195761

VL - 23

SP - 1517

EP - 1543

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

IS - 9-10

ER -