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Firestorm: Multiplicity in Models with Full Information

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  • Jonathan J Adams

    (Department of Economics, University of Florida)

Abstract

Dynamic stochastic models with full information and rational expectations (FIRE) are not as well determined as is commonly believed. In general, FIRE models exhibit a multiplicity that is implicitly ruled out by standard solution methods, which conjecture that equilibria are functions of past shocks alone. The multiplicity is due to the endogenous feedback from choices to information to choices, which in equilibrium may contain self-fulfilling news about future shocks. I demonstrate the multiplicity in several examples, including canonical asset pricing and business cycle models. Then I study how the multiplicity arises in a dynamic programming problem with decentralized markets. Finally, I conclude that the business cycle literature must adopt information frictions.

Suggested Citation

  • Jonathan J Adams, 2021. "Firestorm: Multiplicity in Models with Full Information," Working Papers 001006, University of Florida, Department of Economics.
    • Handle: RePEc:ufl:wpaper:001006
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • 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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