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Learning, information and heterogeneity

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  • Liam Graham

Abstract

Most DSGE models assume full information and model-consistent expectations. This paper relaxes both these assumptions in the context of the stochastic growth model with incomplete markets and heterogeneous agents. Households do not have direct knowledge of the structure of economy or the values of aggregate quanti?ties; instead they form expectations by learning from the prices in their market-consistent information sets. The economy converges quickly to an equilibrium which is similar to the equilibrium with model-consistent expectations and market-consistent information. Learning does not introduce strong dynamics at the aggre-gate level, though more interesting things happen at the household level. At least in the context of this model, assumptions about information seem important for aggregates; assumptions about the ability to form model-consistent expectations less so.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 1113.

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Date of creation: 20 Aug 2011
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Handle: RePEc:san:cdmawp:1113

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Keywords: imperfect information; adaptive learning; dynamic general equilibrium; heterogeneity; expectations.;

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References

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  1. Seppo Honkapohja & Kaushik Mitra, 2006. "Learning Stability in Economies with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 284-309, April.
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  18. Baxter, Brad & Graham, Liam & Wright, Stephen, 2011. "Invertible and non-invertible information sets in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 295-311, March.
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  23. Liam Graham, 2011. " Individual rationality, model-consistent expectations and learning," CDMA Working Paper Series 1112, Centre for Dynamic Macroeconomic Analysis.
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Cited by:
  1. Anton Nakov & Galo Nuño, 2011. "Learning from experience in the stock market," Banco de España Working Papers 1132, Banco de España.
  2. Liam Graham, 2011. " Individual rationality, model-consistent expectations and learning," CDMA Working Paper Series 1112, Centre for Dynamic Macroeconomic Analysis.

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