Informational Fragility of Dynamic Rational Expectations Equilibria
AbstractWe study the stability properties of Rational Expectations equilibria in dynamic models with incomplete information when the information set of agents is slightly perturbed. We show that equilibria where the endogenous variables resolve the information incompleteness can be informationally fragile, in the sense that a slight perturbation in the endogenous information set of the agents along the equilibrium path can lead to a break-down of the equilibrium dynamics. We then construct a class of dynamic rational expectations equilibria that are informationally stable for the same parameter space where other equilibria are informationally fragile. We show that an equilibrium that is informationally fragile is not least-squares learnable, while an equilibrium that is informationally stable always is. We finally present an application to a macroeconomic equilibrium model with productivity shocks and nominal rigidities under incomplete information that shows that both informationally fragile and stable equilibria can be obtained, with quite different shocks propagation properties.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 83.
Date of creation: 2013
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-23 (All new papers)
- NEP-CTA-2013-08-23 (Contract Theory & Applications)
- NEP-DGE-2013-08-23 (Dynamic General Equilibrium)
- NEP-GTH-2013-08-23 (Game Theory)
- NEP-MIC-2013-08-23 (Microeconomics)
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- Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
- Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
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