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A note on Futia (1981)’s non-existence pathology of rational expectations equilibria

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  • Rondina, Giacomo
  • Walker, Todd B.

Abstract

We resolve the non-existence pathologies of dynamic rational expectations equilibria attributed to signal extraction from endogenous variables first discovered by Futia (1981). Non-existence is overturned once it is recognized that rational agents take into account the structure of the model when generating equilibrium outcomes. We show that where Futia (1981) thought an equilibrium did not exist, a Rational Expectations equilibrium identical to the Full Communication equilibrium does exist, thereby resolving the long-standing non-existence pathology.

Suggested Citation

  • Rondina, Giacomo & Walker, Todd B., 2013. "A note on Futia (1981)’s non-existence pathology of rational expectations equilibria," Economics Letters, Elsevier, vol. 120(2), pages 177-180.
    • Handle: RePEc:eee:ecolet:v:120:y:2013:i:2:p:177-180
    DOI: 10.1016/j.econlet.2013.04.022
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    References listed on IDEAS

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    1. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    2. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
    3. Futia, Carl A, 1981. "Rational Expectations in Stationary Linear Models," Econometrica, Econometric Society, vol. 49(1), pages 171-192, January.
    4. Sargent, Thomas J., 1991. "Equilibrium with signal extraction from endogenous variables," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 245-273, April.
    5. Giacomo Rondina, 2013. "Informational Fragility of Dynamic Rational Expectations Equilibria," 2013 Meeting Papers 83, Society for Economic Dynamics.
    6. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
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    More about this item

    Keywords

    Rational expectations; Incomplete information; Information equilibrium;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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