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Learning, information and heterogeneity

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  • Liam Graham

Abstract

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.

Suggested Citation

  • Liam Graham, 2011. "Learning, information and heterogeneity," CDMA Working Paper Series 201113, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmawp:1113
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp1113.pdf
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    References listed on IDEAS

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    Cited by:

    1. Nakov, Anton & Nuño, Galo, 2015. "Learning from experience in the stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 224-239.
    2. Liam Graham, 2011. "Individual rationality, model-consistent expectations and learning," CDMA Working Paper Series 201112, Centre for Dynamic Macroeconomic Analysis.

    More about this item

    Keywords

    imperfect information; adaptive learning; dynamic general equilibrium; heterogeneity; expectations.;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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