Near-rational expectations in animal spirits models of aggregate fluctuations

Abstract

A growing number of studies has raised concerns about the empirical and theoretical content of rational expectations. This paper evaluates the role of near-rationality in dynamic general equilibrium with indeterminacy. We show that sunspot equilibria are quite robust to perturbations of the forecasting mechanism: the particular form of near-rationality considered exerts little effects on the region of indeterminacy. This upshot casts doubt upon the standpoint that bounded rationality effectively reduces the likelihood of sunspot equilibria. The prime impact of bounded behavior appears to be on volatility and persistence.