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The aggregation of dynamic relationships caused by incomplete information

  • Thornton, Michael A.

We consider the aggregation of heterogeneous dynamic equations across a large population, as introduced by Granger (1980), where the dynamics arise because agents face a signal extraction problem caused by incomplete information. This weakens the independence assumptions used previously in the aggregation literature. We show that, under plausible assumptions, the differenced cross-section aggregate shows long term persistence even though every individual micro-series follows a random walk. As an example, estimates of the model’s micro-relations are made using US household panel data.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 178 (2014)
Issue (Month): P2 ()
Pages: 342-351

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Handle: RePEc:eee:econom:v:178:y:2014:i:p2:p:342-351
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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