Exogenous expectations on endogenous uncertainty: recursive equilibrium and survival

Rodrigo Raad ()

No 715, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: This paper analyses general equilibrium models with finite heterogeneous agents having exogenous expectations on endogenous uncertainty. It is shown that there exists a recursive equilibrium with the state space consisting of the past aggregate portfolio distribution and the current state of the nature and that it implements the sequential equilibrium. We establish conditions under which the recursive equilibrium is continuous. Moreover, we use the continuous recursive relation of the aggregate variables to prove that if the economy has two types of agents, the one who commits persistent mistakes on the expectation rules of the future endogenous variables is driven out of the market by the others with correct anticipations of the variables, that is, the rational expectations agents.

Date: 2011-04-18
New Economics Papers: this item is included in nep-cba and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:715

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