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Stabilizing through Poor Information

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  • Gabriel DESGRANGES and Stéphane GAUTHIER

    (THEMA, Université de Cergy-Pontoise; 33, boulevard du Port, 95011 Cergy-Pontoise cedex, France - ENSAE and CREST; 3 avenue Pierre Larousse, 92245 Malako¤ cedex,France)

Abstract

This paper studies the effect of asymmetric information on equilibrium stability in a class of linear models where the actual state depends on the forecasts about it. Stability is deffined by the so-called eductive criterion which relies on common knowledge of rationality. The main result is that stability obtains when the proportion of uninformed agents is high enough. The expectational behavior of these agents indeed displays more inertia. This behavior, and then the actual outcome, are therefore easier to predict. This result is linked to the issue of informational efficiency. Extensions to cases with higher order uncertainty, additional agents heterogeneity, and sunspots are also considered.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-32.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-32

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Related research

Keywords: Asymmetric information; eductive stability; rational expecta- tions; stabilization.;

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  1. GRANDMONT, Jean-Michel, 1997. "Expectations formation and stability of large socioeconomic systems," CORE Discussion Papers 1997088, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. George W. Evans & Seppo Honkapohja, 2008. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," CDMA Working Paper Series 200802, Centre for Dynamic Macroeconomic Analysis.
  3. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  4. Guesnerie, Roger, 1992. "An Exploration of the Eductive Justifications of the Rational-Expectations Hypothesis," American Economic Review, American Economic Association, vol. 82(5), pages 1254-78, December.
  5. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May.
  6. Gabriel Desgranges & Pierre-Yves Geoffard & Roger Guesnerie, 2003. "Do Prices Transmit Rationally Expected Information?," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 124-153, 03.
  7. R. Guesnerie, 2002. "Anchoring Economic Predictions in Common Knowledge," Econometrica, Econometric Society, vol. 70(2), pages 439-480, March.
  8. Kristoffer Nimark, 2007. "Dynamic Pricing and Imperfect Common Knowledge," RBA Research Discussion Papers rdp2007-12, Reserve Bank of Australia.
  9. Christian Hellwig, . "Monetary Business Cycle Models: Imperfect Information (Review Article, March 2006)," UCLA Economics Online Papers 377, UCLA Department of Economics.
  10. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
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