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Learning, information and heterogeneity

  • Liam Graham

Most DSGE models assume full information and model-consistent expectations. This paper relaxes both these assumptions in the context of the stochastic growth model with incomplete markets and heterogeneous agents. Households do not have direct knowledge of the structure of economy or the values of aggregate quanti?ties; instead they form expectations by learning from the prices in their market-consistent information sets. The economy converges quickly to an equilibrium which is similar to the equilibrium with model-consistent expectations and market-consistent information. Learning does not introduce strong dynamics at the aggre-gate level, though more interesting things happen at the household level. At least in the context of this model, assumptions about information seem important for aggregates; assumptions about the ability to form model-consistent expectations less so.

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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/wp1113.pdf
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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201113.

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Date of creation: 20 Aug 2011
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Handle: RePEc:san:cdmawp:1113
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