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Knowing the Forecasts of Others

Author

Listed:
  • Joseph G. Pearlman

    (London Metropolitan University)

  • Thomas J. Sargent

    (New York University)

Abstract

We apply recursive methods to obtain a finite dimensional and recursive representation of an equilibrium of one of Townsend's models of 'forecasting the forecasts of others'. The equilibrium has the property that decision makers make common forecasts of the hidden state variable whose presence motivates them to pay attention to prices in other markets. Thus, the model has too few sources of randomness to put decision makers into a situation where they should form 'higher order beliefs' (i.e., beliefs about others' beliefs). In Townsend's model, they know the beliefs of others because they share them. We attain our finite-dimensional recursive representation by applying methods of Pearlman, Currie, and Levine (1986). (Copyright: Elsevier)

Suggested Citation

  • Joseph G. Pearlman & Thomas J. Sargent, 2005. "Knowing the Forecasts of Others," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 480-497, April.
  • Handle: RePEc:red:issued:v:8:y:2005:i:2:p:480-497
    DOI: 10.1016/j.red.2004.10.011
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    References listed on IDEAS

    as
    1. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Cowles Foundation Discussion Papers 1406, Cowles Foundation for Research in Economics, Yale University.
    2. Anderson, Evan W. & McGrattan, Ellen R. & Hansen, Lars Peter & Sargent, Thomas J., 1996. "Mechanics of forming and estimating dynamic linear economies," Handbook of Computational Economics,in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 4, pages 171-252 Elsevier.
    3. Pearlman, Joseph & Currie, David & Levine, Paul, 1986. "Rational expectations models with partial information," Economic Modelling, Elsevier, vol. 3(2), pages 90-105, April.
    4. Kenneth Kasa, 2000. "Forecasting the Forecasts of Others in the Frequency Domain," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 726-756, October.
    5. Sargent, Thomas J., 1991. "Equilibrium with signal extraction from endogenous variables," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 245-273, April.
    6. Michael Woodford, 2001. "Imperfect Common Knowledge and the Effects of Monetary Policy," NBER Working Papers 8673, National Bureau of Economic Research, Inc.
    7. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-588, August.
    8. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-1144, December.
    9. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Dan Bernhardt & P. Seiler & B. Taub, 2010. "Speculative dynamics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 44(1), pages 1-52, July.
    2. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and private information in monetary policy models," BIS Working Papers 138, Bank for International Settlements.
    3. Walker, Todd B., 2007. "How equilibrium prices reveal information in a time series model with disparately informed, competitive traders," Journal of Economic Theory, Elsevier, vol. 137(1), pages 512-537, November.
    4. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
    5. Todd B. Walker, 2005. "How Equilibrium Prices Reveal Information in Time Series Models with Disparately Informed, Competitive Traders," Finance 0509021, EconWPA.
    6. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Cowles Foundation Discussion Papers 1406, Cowles Foundation for Research in Economics, Yale University.
    7. Nimark, Kristoffer P., 2003. "Indicator Accuracy and Monetary Policy: Is Ignorance Bliss?," Working Paper Series 157, Sveriges Riksbank (Central Bank of Sweden).
    8. Giacomo Rondina & Todd Walker, 2016. "Learning and Informational Stability of Dynamic REE with Incomplete Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 147-159, July.
    9. Vidakovic, Neven, 2014. "Exchange rate regime and household's choice of debt," MPRA Paper 54219, University Library of Munich, Germany.
    10. Philippe Bacchetta & Eric Van Wincoop, 2008. "Higher Order Expectations in Asset Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 837-866, August.
    11. Paul Levine & Joseph Pearlman & George Perendia, 2007. "Estimating DSGE Models under Partial Information," School of Economics Discussion Papers 1607, School of Economics, University of Surrey.
    12. Kristoffer Nimark, 2009. "Speculative dynamics in the term structure of interest rates," Economics Working Papers 1194, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2012.
    13. repec:eee:macchp:v2-1065 is not listed on IDEAS
    14. University of California & Giacomo Rondina, 2008. "Incomplete Information and Informative Pricing: Theory and Application," 2008 Meeting Papers 981, Society for Economic Dynamics.
    15. Philippe Bacchetta & Eric van Wincoop, 2005. "Can Information Heterogeneity Explain the Exchange Rate Determination?," FAME Research Paper Series rp155, International Center for Financial Asset Management and Engineering.
    16. Pearlman, Joseph G., 2005. "Central bank transparency and private information in a dynamic macroeconomic model," Working Paper Series 455, European Central Bank.
    17. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets Capital Adequacy Regulation: In Search of a Rationale," Center for Financial Institutions Working Papers 03-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
    18. Makarov, Igor & Rytchkov, Oleg, 2012. "Forecasting the forecasts of others: Implications for asset pricing," Journal of Economic Theory, Elsevier, vol. 147(3), pages 941-966.

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