Does Near-Rationality Matter in First-Order Approximate Solutions? A Perturbation Approach
This paper studies first-order approximate solutions to near-rational dynamic stochastic models. Under near-rationality, subjective beliefs are distorted away from rational expectations via a change of measure process which fulfils some regularity conditions. As a main result, we show that equilibrium indeterminacy may arise even when the martingale representation of beliefs distortion depends on the economy's fundamentals solely. This provides theoretical support to the modeling assumptions of Woodford [American Economic Review 100, 274-333 (2010)]
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- Michael Woodford, 2010.
"Robustly Optimal Monetary Policy with Near-Rational Expectations,"
American Economic Review,
American Economic Association, vol. 100(1), pages 274-303, March.
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- Frank Hespeler, 2008. "Solution Algorithm to a Class of Monetary Rational Equilibrium Macromodels with Optimal Monetary Policy Design," Computational Economics, Springer;Society for Computational Economics, vol. 31(3), pages 207-223, April. Full references (including those not matched with items on IDEAS)
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