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The aggregation of dynamic relationships caused by incomplete information

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  • Thornton, Michael A.

Abstract

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.

Suggested Citation

  • Thornton, Michael A., 2014. "The aggregation of dynamic relationships caused by incomplete information," Journal of Econometrics, Elsevier, vol. 178(P2), pages 342-351.
  • Handle: RePEc:eee:econom:v:178:y:2014:i:p2:p:342-351
    DOI: 10.1016/j.jeconom.2013.08.032
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    Keywords

    Incomplete information; Aggregation of dynamic relationships; Long memory; Household behaviour;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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