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Investment Dynamics with Natural Expectations

Andreas Fuster1, Benjamin Hebert, David Laibson

  • 1Federal Reserve Bank of New York.

International Journal of Central Banking
|December 18, 2012
PubMed
Summary

Agents underestimate mean reversion, leading to overly optimistic beliefs in good times and pessimistic beliefs in bad times. This results in amplified investment cycles and excessive price volatility in financial markets.

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