Exponentially fading memory learning in forward-looking economic models

In this paper we analyze forward-looking economic models under bounded rationality. We consider a learning mechanism characterized by exponentially fading memory with a learning step not vanishing in the limit. The dynamics of the model under bounded rationality can be parametrized with respect to the memory of the learning mechanism. We show that memory plays a stabilizing role in a local sense: it induces local convergence towards a stationary rational expectations equilibrium and in some cases it does not allow for nonperfect foresight attractors obtained through local bifurcations. We discuss this learning mechanism in pure exchange overlapping generations models. We also analyze models with predetermined state variables, in this setting the effect of memory on the learning dynamics is controversial. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification. D83; D84; E21; E32.