Non-Falsified Expectations, General Equilibrium Asset Pricing and the Peso Problem
We discuss the extent to which the expectation of a rare event, not present in the usual postwar sample data, but not rationally excludable from the set of possibilities - the peso problem -, can effect the equilibrium behavior of rational agents and the characteristics of market equilibrium. To that end we describe quantitatively the macroeconomic and financial properties of a standard equilibrium business cycle model modified to allow for a very small probability of a depression state.
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|Date of creation:||Oct 1996|
|Date of revision:|
|Publication status:||Published in The Economic Journal, No.109, 1999, pp. 607-735|
|Contact details of provider:|| Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne|
Phone: ++41 21 692.33.20
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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