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On Perfect Foresight Models of a Stochastic World

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  • Haliassos, Michael

Abstract

Long-run analysis is often based on perfect foresight equilibrium relationships arbitrarily augmented to incorporate stochastic shocks. This paper examines whether perfect foresight models admit interpretations as limits of stochastic economies and reflect long-run behavior and policy effects. It provides a novel interpretation of such models, specifies consistency criteria for long-run analysis, and proposes metrics for model convergence. Analytical and calibration exercises are conducted to show that convergence to perfect foresight need not occur and even when it occurs it does not ensure that relationships between long-run averages or low-frequency components are captured by perfect foresight models. Copyright 1994 by Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 104 (1994)
Issue (Month): 424 (May)
Pages: 477-91

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Handle: RePEc:ecj:econjl:v:104:y:1994:i:424:p:477-91

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Cited by:
  1. Panos Hatzipanayotou & Sajal Lahiri & Michael S. Michael, 2002. "Reforms of Environmental Policies in the Presence of Cross-border Pollution and two Stage Clean Up," University of Cyprus Working Papers in Economics 0203, University of Cyprus Department of Economics.
  2. Michael Haliassos & Christis Hassapis, 1997. "Non-expected Utility, Saving, and Portfolios," Macroeconomics 9709003, EconWPA, revised 11 Apr 1998.
  3. Michael Haliassos, 2002. "Stockholding: Recent Lessons from Theory and Computations," University of Cyprus Working Papers in Economics 0206, University of Cyprus Department of Economics.
  4. Michael Haliassos & Christis Hassapis, 1999. "Borrowing Constraints, Portfolio Choice and Precautionary Motives: Theoretical Predictions and Empirical Complications," Computing in Economics and Finance 1999 1341, Society for Computational Economics.
  5. Bertaut, Carol C. & Haliassos, Michael, 1997. "Precautionary portfolio behavior from a life-cycle perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1511-1542, June.
  6. Michael Haliassos & Christis Hassapis, 1998. "Borrowing Constraints, Portfolio Choice, and Precautionary," Macroeconomics 9809008, EconWPA.
  7. Christou, Costas & Swamy, P. A. V. B. & Tavlas, George S., 1998. "A general framework for predicting returns from multiple currency investments," Journal of Economic Dynamics and Control, Elsevier, vol. 22(7), pages 977-1000, May.
  8. Panos Pashardes & Soteroula Hajispyrou, 2002. "Consumer Demand and Welfare under Increasing Block Pricing," University of Cyprus Working Papers in Economics 0207, University of Cyprus Department of Economics.

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