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On endogenous formation of price expectations

Author

Listed:
  • Cuong Le Van

    (IPAG Business School, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, TIMAS - Institute of Mathematics and Applied Science, Academy of Policy and Development - Partenaires INRAE)

  • Paulina Navrouzoglou

    (University of Glasgow Adam Smith Business School)

  • Yiannis Vailakis

    (University of Glasgow Adam Smith Business School)

Abstract

We study a two-period exchange economy with complete financial markets and endogenous borrowing constraints. Contrary to perfect foresight paradigm, we assume that agents are heterogeneous in their ability to forecast future prices. We introduce a new equilibrium concept, called informationally constrained equilibrium, where the formation of price expectations is endogenous and reflects the revelation of information from observing bounds on liabilities designed to ensure solvency at any contingency. We prove that, under standard assumptions, an equilibrium always exists and we characterize the degree of information revealed by the endogenous debt limits.

Suggested Citation

  • Cuong Le Van & Paulina Navrouzoglou & Yiannis Vailakis, 2019. "On endogenous formation of price expectations," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-03261223, HAL.
    • Handle: RePEc:hal:cesptp:hal-03261223
    DOI: 10.1016/j.geb.2019.03.004
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    Cited by:

    1. Vladan Pavlovic & Goranka Knezevic & Antonio Andre Cunha Callado, 2022. "Is the Corporate Solvency Conundrum Primarily a Balkan Issue or a Broader European Continental Misunderstanding?," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 72-93.

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