Importance One of the drawbacks of dynamic stochastic general equilibrium models (DSGE models) is the formation of expectations in these representative agent models with a constant rate of time preference. Therefore, it is relevant to consider the process of formation of expectations in models with heterogeneous agents and endogenous discount rate. Objectives The purpose of the work is to study the effect of endogenous rate of time preference on the dynamics of stochastic models with heterogeneous agents using the algorithm of formation of expectations associated with training the agents under the trail-and-error method. Methods Using the mathematical modeling, I investigated the effect of endogenous rate of time preference on the volatility of variables in a dynamic stochastic model with heterogeneous agents. Results The study delivered the results on decomposition of the variance of endogenous variables. Furthermore, I analyzed the convergence of the algorithm of expectations formation. The study shows that the availability of feedback for time preference rate reduces the volatility of variables under consideration. In addition, in models with endogenous rate of time preference, the convergence of the algorithm of expectations formation is much higher than the rate of convergence of the algorithm in models with a constant rate of time preference. Conclusions and Relevance The findings may be of interest to those involved in the analysis of large-scale DSGE models, which are one of the basic tools of macroeconomic analysis. The conclusion on the mechanism of expectations formation in models with heterogeneous agents may be useful for the econometric analysis of economic systems.
Keywords: heterogeneous agents, expectations, endogenous rate, time preference, trial-and-error method
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